2008 Financial Crisis के 2 मुख्य कारण | 2008 recession Explained and Simplified in Hindi

Summary

The 2008 financial crisis was triggered by a series of events starting with the dot-com bubble burst, leading to low-interest rates and a shift in investment to real estate. Banks issued risky subprime loans, bundled into Collateral Debt Obligations (CDOs) with high AAA ratings, which investment banks aggressively sold. The adjustable-rate mortgages led to defaults as rates soared, causing a housing market crash and a liquidity crisis for banks. AIG's insolvency due to credit default swaps (CDS) led to a government bailout, while the collapse of Lehman Brothers and others marked a global recession, highlighting a lack of regulation and oversight.

Takeaways

• 💻 The 2008 financial crisis was rooted in the aftermath of the dot com bubble burst and low-interest rates, which led to a shift in investment from stocks to real estate.
• 🏠 The US housing market boomed as people sought loans to buy houses, encouraged by low-interest rates and government policies.
• 💼 Investment banks capitalized on the real estate boom by bundling loans into Collateral Debt Obligations (CDOs), which were then sold to investors.
• 🔢 Credit rating agencies played a crucial role by assigning high AAA ratings to many CDOs, despite their underlying risk from subprime loans.
• 📉 The housing market collapse began when adjustable-rate mortgages reset to higher rates, causing many borrowers to default on their loans.
• 📈 The value of houses plummeted as defaults increased, leading to a flood of foreclosed properties and a sharp decline in property prices.
• 💡 Banks and investment banks faced severe losses as the value of CDOs and related assets became worthless, culminating in the bankruptcy of Lehman Brothers.
• 🚨 The crisis exposed the lack of regulation and oversight over complex financial products like CDOs and Credit Default Swaps (CDS).
• 🌐 The crisis had a domino effect, impacting global economies and leading to a worldwide recession due to the interconnectedness of financial markets.
• 🏦 The US government intervened to prevent further collapse, notably by bailing out insurance giant AIG to the tune of $85 billion.
• 📚 Economist Raghuram Rajan had warned of a potential crisis in 2005, but his predictions were initially met with skepticism from the financial community.

Q & A

What was the dot com boom and how did it relate to the 2008 financial crisis?

The dot com boom was a period of rapid growth in the US technology sector in the late 1990s, characterized by high stock prices for tech companies. When the dot com bubble burst between 2000 and 2002, stock prices plummeted, leading to a withdrawal of investment from the stock market, which set the stage for investors to look for alternative opportunities, such as the real estate market, eventually contributing to the 2008 crisis.

Why did investors shift from the stock market to real estate after the dot com bubble burst?

After the dot com bubble burst, the US Federal Reserve lowered interest rates to 1%, making the stock market less attractive for investors. With low-interest rates, investors sought better returns and turned to the real estate market, which was experiencing an upswing, encouraged by the government and the low borrowing costs.

What is a Collateralized Debt Obligation (CDO) and how was it created?

A Collateralized Debt Obligation (CDO) is a complex financial derivative product created by investment banks. They bundled various loans, including mortgages, into a package and sold it as a new investment product to investors. The CDOs were given credit ratings by agencies, which often assigned high ratings, leading to their widespread sale.

How did the practice of giving AAA ratings to CDOs contribute to the financial crisis?

The AAA ratings given to many CDOs by credit rating agencies indicated that they were very safe investments. This led to a high demand for CDOs, even those composed of subprime loans. When the subprime loans started defaulting, the value of these CDOs collapsed, revealing the AAA ratings as misleading and contributing significantly to the financial crisis.

What are subprime loans and why were they problematic?

Subprime loans are home loans given to borrowers with poor credit histories or low incomes, who typically would not qualify for prime loans. They were problematic because many of these loans were adjustable-rate mortgages, which started with low interest rates but could adjust to much higher rates after a few years. When rates increased, many subprime borrowers could not afford the payments and defaulted, leading to a wave of foreclosures.

What is a Credit Default Swap (CDS) and how did it relate to the financial crisis?

A Credit Default Swap (CDS) is a type of insurance that investors could buy to protect themselves against the default of a CDO. AIG, the largest insurance company, provided these CDSs on CDOs. When the CDOs failed, AIG faced massive losses, leading to a bailout by the US government to prevent a systemic collapse.

Why did banks start giving out subprime loans without proper verification?

Banks started giving out subprime loans without proper verification due to the high demand for loans from investment banks to create CDOs. The banks were also motivated by the commissions they received from selling these loans to investment banks, leading to a relaxation of lending standards.

How did the adjustable-rate nature of many subprime loans contribute to the crisis?

The adjustable-rate nature of many subprime loans meant that borrowers initially paid low interest rates but faced a significant increase after a few years. Many borrowers were not aware of this feature and were unable to afford the higher rates when they adjusted, leading to widespread defaults and foreclosures.

What role did the lack of regulation play in the 2008 financial crisis?

The lack of regulation allowed financial products like CDOs and CDSs to proliferate without oversight. This lack of control contributed to the creation and sale of risky financial products, which, when they failed, led to a systemic crisis affecting the entire financial system.

What was the impact of the 2008 financial crisis on the global economy?

The 2008 financial crisis had a profound impact on the global economy, leading to a global recession. As the US is the world's largest economy, its downturn affected trade and economic activity worldwide. Many countries faced severe economic challenges, with some even going bankrupt.

Who was Raghuram Rajan and why is he significant in the context of the 2008 financial crisis?

Raghuram Rajan was the chief economist of the IMF in 2005. He predicted the financial crisis in his research papers, warning about the risks associated with the financial products and practices that eventually led to the crisis. His predictions were initially met with criticism from many in the financial industry.