The financial crash of 2008 was caused by a run on the banks. Banks such as Northern Rock, a large British bank, were forced to ask the Bank of England for help. People started losing faith in banks and the run on the banks led to major bailouts. While the crash was not entirely predictable, there were some economic models that predicted it and people who benefited from it. But the economic models themselves were not entirely correct.
Economics of a financial crisis
The main policy response of the world’s central banks during the GFC was to cut interest rates rapidly. This was intended to boost economic activity and prevent further recession. However, by late 2007, economic activity had slowed dramatically. After the collapse of Lehman Brothers and the subsequent recession, the policy response ramped up. Central banks lowered interest rates to near-zero levels, and lent large amounts of money to institutions with good assets, with the intention of supporting the economy by boosting growth.
The bursting of the housing bubble in the U.S. contributed to the onset of the financial crisis. The successive decreases in the prime rate induced banks to issue mortgage loans to millions of unqualified customers. This helped drive up the demand for new housing and drove home prices up. However, as interest rates began to rise in 2005, demand for housing declined and the collapse of the housing bubble began. However, the economic downturn is not limited to this one country; many countries and regions around the world have experienced financial crises.
Economic models that did not predict the 2008 financial crisis
In the aftermath of the 2008 financial crisis, Queen Elizabeth asked, “How come economic models did not predict the financial crisis?” David Hendry and Grayham Mizon explain why this was so. The reason is that economic models did not consider the financial institutions as agents in the economy, which would explain the failure of the models to predict the financial crisis. Instead, these models focus on individual decisions and the behavior of institutions.
In addition, economic forecasting models based on the law of iterated expectations failed to predict the severity of the 2008 financial crisis. Several of these models failed to recognize a critical turning point early in the economic cycle, which would lead to the global financial crisis. Even though these models are based on redundant information, they did not predict the severity of the crisis. Even if the models were able to anticipate the 2008 financial crisis, they were not able to predict the ensuing financial meltdown.
People who profited from the 2008 financial crisis
Some of the most notable victims of the financial crisis were Wall Street giants such as Bear Stearns and Lehman Brothers. This crisis permanently altered the financial system and the American economy. It was the worst economic collapse since the Great Depression. Over eight trillion dollars was lost in the stock market and the unemployment rate reached 10 percent in October 2009. In all, Americans lost nearly $9 trillion in wealth. But there are also those who profited from the 2008 financial crisis.