2008 Economic Crisis, Solutions and Policies


The latest global financial crisis is a severe fiscal and monetary crisis that has been experienced globally since the 1930s Great Depression. The significant decline in economic growth and practices of financial institutions in 2007 and 2008 was mainly blamed on the subprime mortgage crisis, where it enabled the world to face huge layoffs, private defaults, credit crunch, housing bubbles, and credit crunch. As a result of this global crisis, the financial institutions have experienced a collapse, financial markets have also declined, and even the governments from advanced economies have provided incentives for their financial institutions or a bailout. This paper discusses the economic crisis and solutions to this condition, including the policies needed to be changed to reduce possibilities of recurring.


However, most people are worried that the financial institutions that caused the financial crisis are the one receiving the bailout, yet the global financial crisis will have a greater impact on the income and livelihoods of nearly every individual in a more and more interconnected world. This condition resulted in a rapid weakening in economic activity and contained a risk of bringing about an economic recession.

As a result, this forced international investors to seek their own sources of funds so that they can withdraw from the country that can bring about confidence loss both in the national currency and economy of the country. Financial crisis is the condition where there is a decline in the value of the financial assets and institutions, and this leads the investors to withdraw their funds or sell their assets from the financial institutions’ saving accounts due to their expectation that the assets’ value will decline if the assets stay at these banks (Crotty 565).

The subprime financial crisis situation posed a threat of entire downfall of major financial institutions, depression in global stock market, and the bank bailouts by the country’s government. Moreover, in most regions, the housing markets were severely affected, leading to lengthy unemployment, foreclosures, and evictions (Ciro 54). Central banks had to intervene due to the worries regarding the instability of the major financial institutions, where they had to take immediate due process to offer financial support to promote lending and recover confidence in the financial markets that are the essential entities to the funding business activities. If this crisis left unattended, it can bring about the global economy to enter a depression or recession.

Causes of Economic Crisis

The global financial crisis (GFC) is mostly considered to have started in mid-2007 through the popular credit crunch (Ciro 54). This crisis started with the confidence loss by the American investors in the subprime mortgages’ value that brought about a liquidity crisis. This also led to the American government inserting huge amount of funds into the financial markets and housing sector. By the end of 2008, the subprime crisis had deteriorated as some financial markets, especially stock markets, across the world collapsed and become greatly unstable. Investor and consumer confidence was in the minimal point as most companies and individuals reduced their activities due to the fear of what they were expecting from the crisis.

As mostly responsible for global financial crisis, the subprime financial crisis started with the overflowing of the United States’ housing bubbles and spread to cause global financial crisis between 2007 and 2008 (Crotty 565). This financial crisis is felt in most countries, including the European sovereign debt crisis. For most years, an increase in the prices of houses and interest rates remained low.

Moreover, subprime mortgages were widely accessible and repayment was less-expensive. Therefore, when the housing prices began to decline and interest rates went up, repayment became expensive and the risks that surrounded subprime mortgages were exposed. The subprime financial or mortgage crisis experienced in the United States was a group of situations and incidents that resulted in a financial crisis and succeeding recession that started in 2008.

Primarily, Collateralized debt obligations (CDO) and mortgage-backed securities (MBS) provided striking return rates as a result of the high mortgage’s interest rates, but the low credit value eventually resulted in extensive defaults (Ciro 56). Some effects of the economic crisis started to be experienced in 2007, but some major financial institutions and companies collapsed or declined in their operations in almost the end of 2008.

Various factors caused the financial crisis, where most economists considering that the crisis was caused mainly by government housing policies, financial institutions, credit agencies, regulators, consumers, etc. However, subprime lending is the immediate cause of the crisis. When American housing prices decreased sharply after topping in mid-2006, it developed to be more complex for borrowers to repay their loans.

As modifiable-rate mortgages started to return with high interest rates, which brought about high monthly payments, mortgage failures rose. Mortgage-related securities such as subprime mortgages, broadly contained by financial institutions around the world, lost some of their values. Moreover, international investors radically lessened their procurements of mortgage-backed debt and other significant securities due to the failure in the ability and readiness of the private financial institutions to provide backing or support on lending.


To manage financial crisis, various approaches are proposed to be followed by all parties. For the better future financial markets, monetary, fiscal, and mortgage policies should be amended with the purpose of providing macroeconomic stability and to provide support to the households. Moreover, macroeconomic policies are essential to prevent more severe risks and stop financial crisis in the future. Also, the investment banks should decrease more their ratio of the asset-to-equity leverage, and the rating sectors should amend their approaches to make up more risk factors with the aim of offering investors with better clearness concerning the drawbacks of their ratings and details concerning the impact of their ratings to the financial risk factors (Ciro 55).

The other approach is to create the national economy less reliance on financial capitalists. Therefore, the best approach to achieve this is for the government itself to provide credit on their economy, mostly for the housing mortgage, and possibly for business and consumer loans. Also, there should be some forms of government regulations and policies that can protect the customers or investors and prevent these businesses’ conflicts of interest.


The global financial crisis affected the financial markets and institutions, as well as the growth of existing businesses in the region. Foreign investors and financial banks lost confidence due to the lengthy and severe impact of the crisis. Therefore, banks began to restrict and limit their lending mostly to the SMEs, and as a result, increasing unemployment rates. Foreign investors started to withdraw their funds and investment due to the fear of business loss. The government came in to provide stimuli, but the growth recovery may take a longer time. The financial crisis was facilitated mostly by four drivers: reduction in bank lending services, reduced confidence in the financial institutions, and housing bubble.

Works Cited

Ciro, Tony. The Global Financial Crisis: Triggers Responses and Aftermath. New York: Ashgate Publishing, 2013. Print.

Crotty, James. “Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’.” Cambridge Journal of Economics 33 (2009): 563–580. Print.

Cite this paper

Select style


BusinessEssay. (2022, December 12). 2008 Economic Crisis, Solutions and Policies. Retrieved from https://business-essay.com/2008-economic-crisis-solutions-and-policies/


BusinessEssay. (2022, December 12). 2008 Economic Crisis, Solutions and Policies. https://business-essay.com/2008-economic-crisis-solutions-and-policies/

Work Cited

"2008 Economic Crisis, Solutions and Policies." BusinessEssay, 12 Dec. 2022, business-essay.com/2008-economic-crisis-solutions-and-policies/.


BusinessEssay. (2022) '2008 Economic Crisis, Solutions and Policies'. 12 December.


BusinessEssay. 2022. "2008 Economic Crisis, Solutions and Policies." December 12, 2022. https://business-essay.com/2008-economic-crisis-solutions-and-policies/.

1. BusinessEssay. "2008 Economic Crisis, Solutions and Policies." December 12, 2022. https://business-essay.com/2008-economic-crisis-solutions-and-policies/.


BusinessEssay. "2008 Economic Crisis, Solutions and Policies." December 12, 2022. https://business-essay.com/2008-economic-crisis-solutions-and-policies/.