One week later, on Oct. 6, the federal government enacted emergency guidelines enabling the FME to assume control of banks. Through this law, Landsbanki and Glitnir were formally nationalized by Icelandic authorities. The Icelandic Finance Ministry operates as a department of the national government.
One channel the 2008 crisis followed was the public holding of financial assets by governments, banks, and financial institutions across nations. Mortgages issued in the United States serve as a prime example.
Markets Are Pricing In A Stormy 2020 Finale
Beyond cutting the target interest rate, the Federal Reserve and the U.S. government deployed a broad array of measures to counter the Great Recession and soften its impact on the economy. By the end of 2008, the Fed had lowered the target rate to near zero for the first time in history, aiming to spur borrowing and jumpstart investment.
Banks and other financial institutions worldwide faced a sustained rise in non-performing loans for an extended period. The COVID-19 downturn further hit low-income households and smaller firms with limited buffers against insolvency. Fears of additional cascading failures prompted the Troubled Asset Relief Program in October 2008, granting the U.S. government $700 billion to purchase distressed assets and stabilize markets, with hopes of selling them later at a profit. Even with these interventions, economic troubles persisted.
Institutional Structure And Policy Responses
In late July, discussions about delaying a presidential election intensified as the economy, voting systems, and public health concerns during COVID-19 remained unsettled. A second stimulus package was being shaped as components of prior relief—eviction protections and enhanced unemployment benefits—expired. Aggressive monetary policies aimed at taming inflation contributed to a deep recession, with manufacturing, automotive, and construction sectors seeing sharp unemployment increases, moving the rate higher by nearly four percentage points.
As deficits widened, GDP growth failed to translate into a meaningful improvement in debt-to-GDP ratios for many nations. Eurostat reported the debt-to-GDP ratios for the 17 euro-area countries as 70.1% in 2008, 79.9% in 2009, 85.3% in 2010, and 87.2% in 2011.
Household Debt And Earnings
During the crisis, more than 13,000 CDOs rated AAA defaulted, underscoring the fragility of even highly rated assets. The crisis began in London and quickly spread to continental Europe. In the mid-1700s, the British Empire built vast wealth through colonial trade and finance, fueling a period of rapid credit growth by many British banks. The era’s exuberance ended sharply on June 8, 1772, when Alexander Fordyce, a partner in a leading banking house, fled to France to escape debt repayments.
Just as affordable mortgages propelled growth in recent decades, inexpensive corporate debt fueled expansion as well. The government stepped in to rescue major banks and prevent a broader panic.
Early Nineties Recession In The United States
The economic fallout from this pandemic cannot be fully resolved until the disease itself comes under control. History suggests that ending the acute phase will require bold, timely policy actions. Observers note that during the Depression, free-market confidence waned, giving rise to greater regulation as markets alone did not sustain stable progress.
As mortgage origination surged, so did fees and profits for originators, irrespective of borrower creditworthiness. Investment banks earned substantial fees from securitization, effectively acting as brokers in the process. They bought mortgages from originators, sold them to investors, and extracted most earnings from processing charges. Consequently, higher volumes of mortgage-backed securities supported greater income for banks, even when borrowers faced future payment challenges. This environment left non-financial firms starved for capital, while workers faced stagnant wages and a persistent desire to borrow for homes, cars, or essential needs. Financial services increasingly targeted households as primary borrowers in the preceding decade.
Rising Interest Rates
Government bailouts helped stabilize markets, but public perception of fairness remained mixed. This paper outlines the context for the Asian Development Outlook 2009, focusing on rebalancing growth in developing Asia and, by extension, the global economy. The discussion here is cautiously speculative, rooted in past crisis experiences and current banking holdings. The aim is to illuminate worst-case possibilities without asserting inevitability, encouraging readers to consider future policy choices and risk management.
The crisis affected China mainly through trade linkages. As economic activity slowed in various economies, demand for Chinese goods declined, reducing domestic output, household income, and consumer spending via the multiplier effect. The United Kingdom faced early systemic stress when Northern Rock experienced a run in September 2007.
1838 Recession
In the United States, the Great Recession is considered to have begun in December 2007. Through its duration, GDP contracted by about 4.3%, and unemployment rose toward the ten percent mark. The urgency to respond to the present shock remains strong, distinct from prior crises, yet equally pressing.
Meanwhile, sovereign credit downgrades reached historical levels in 2020. While advanced economies were affected, banks in emerging and developing markets felt sharper consequences where government credit ratings hovered near junk. In the most extreme cases of default or restructuring, banks faced losses on government securities holdings.
Why Do Economies Slip After A Financial Crisis?
Although China owned many U.S. assets, most were not tied directly to mortgage-backed securities. Instead, substantial holdings in U.S. Treasury securities remained a major link. While broader policy changes such as the Dodd-Frank Act persisted, discussions about potential rollbacks and enforcement vary with political dynamics. The line of action in upcoming years will shape how financial sector executives are pursued and how regulatory priorities evolve, especially around crime, immigration, and broader economic stability. The landscape for financial regulation remains a live debate, with implications for global capital flows and lending practices that influence households and businesses alike.