2008 Global Financial Crisis: An Overview

The global financial crisis of 2007-2008, often referred to as the "Great Recession," was a severe
worldwide economic crisis that had its roots in the United States housing market. Here's a brief
case study of the crisis:
- The crisis was triggered by the bursting of the housing bubble in the United States, which was
fueled by a combination of factors including subprime mortgages (high-risk loans to borrowers
with poor credit), low interest rates, and a housing market speculation boom.
- Financial institutions had bundled these risky mortgages into complex financial products called
mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), which were sold
to investors worldwide.

Key Events

1. Housing Market Collapse: As housing prices began to decline in 2006, many homeowners
found themselves unable to make mortgage payments, leading to a surge in mortgage defaults
and foreclosures.

2. Financial Institution Failures: The exposure of major financial institutions to these toxic
mortgage-backed securities led to concerns about their solvency. Lehman Brothers, a prominent
investment bank, filed for bankruptcy in September 2008, sending shockwaves through the
global financial system.

3. Credit Freeze: The fear of exposure to bad debt caused banks to stop lending to one another,
resulting in a freezing of credit markets. This lack of liquidity severely impacted businesses and
consumers who relied on credit for day-to-day operations and investments.

4. Stock Market Decline: Stock markets around the world experienced sharp declines as
investor confidence plummeted.
5. Government Interventions: Governments and central banks intervened to stabilize the
financial system. The U.S. government implemented the Troubled Asset Relief Program (TARP)
to inject capital into struggling banks and provided guarantees for money market funds.

Impacts of Crisis: Globally

Macro Level:

After the 2008 financial crisis, advanced countries implemented various policies to mitigate its

impact on their economies. European countries like Italy, Spain, and Greece implemented

austerity measures to reduce their budget deficits. Central banks injected significant liquidity into

the capital market to prevent a collapse similar to the 1930s Great Depression. The crisis led to

declining GDP, increased public debt, and rising borrowing costs, while households experienced

financial insecurity due to job loss, reduced salaries, and falling house prices. Unemployment

increased to 9%, while exports dropped by 20% and stock market prices decreased by about

45%.

US Households Net Assets worth Decline: The 2007 subprime mortgage loan crisis

significantly impacted the US economy and people, leading to a significant decrease in the

average net value of US citizens from $126,300 to $77,400 between 2007 and 2010. This decline

was largely due to a decrease in home prices, which had not stopped since the housing bubble

burst in 2007. The average net worth of US families dropped by about 40%, wiping out savings

of most households for about 16 years. The average wages also decreased, affecting the income

of the working class. However, the net worth of the top 10% of the rich class increased from $.18

million to $1.20 million between 2007 and 2010. The decline in income led to over 46 million
people seeking food stamps, costing the US government $75.7 billion in 2011. Half of these were

small children whose parents had no money to feed them properly.

Unrest in Middle Class:

The falling income and net worth of assets led to discontent among common people in the US

and Europe, leading to protest campaigns demanding the end of capitalism and an equitable

distribution of income. Activists formed groups in Europe and the US, leading to the "Take back

dream conference" in Washington. They argued that the US economy has failed due to high

corruption and that the corrupted system threatens the economic betterment of common citizens.

Globally Violent Protests: ‘In US’ ,Protesters occupied the Park in New York City, demanding

the end of exploitation, income inequality, and job provision. The protest was against the

growing inequality and concentration of wealth, and the dominance of Wall Street brokers in the

national economy and politics. The New York Administration instructed the protestors to vacate

the park due to security issues for those working in the New York Stock Exchange building.

Despite the New York Police Chief's warnings, hundreds of protestors were arrested, with most

being arrested under the law of trespassing. The protest campaign spread to other US cities,

including Oakland and Chicago. There were other countries as well who did protest such as

Spain, Italy and Germany.

Impacts on India:

India's economy faced challenges in 2008-09 due to the subprime mortgage crisis, which led to a

global crisis. Economic growth declined by 2.1% to 6.7%, with per capita GDP growth of 4.6%.

The crisis intensified and spread to emerging economies, creating a supply demand imbalance in

the foreign exchange market. The Indian government responded with fiscal stimulus packages,
increasing the fiscal deficit from 2.7% to 6.2% of GDP. The RBI's key policy rates signaled a

contractionary monetary stance.

Timeline of the Events

Figure 1 and Figure 2 depict the US financial crisis timelines, highlighting key events such as the

spike in subprime mortgage delinquencies, the Troubled Asset Relief Program, and the American

Recovery and Reinvestment Act of 2009. The timelines are divided into two parts, labeled

"September 1" and "October 1," and emphasize the seriousness and urgency of the situation. The

color scheme is muted, emphasizing the importance of the events and the gravity of the situation.

Both timelines convey a sense of urgency and instability as financial institutions collapsed.
Figure 1
Figure 2
Shows
Government Policies

The 2008 global financial crisis had a significant impact on the world economy, including India,

although its effects were not as severe compared to some Western countries. The Indian

government's response was a combination of monetary and fiscal measures to safeguard the

economy from the crisis. Here are the key policies implemented by the Indian government:

Monetary Policy Measures by the Reserve Bank of India (RBI):

1. Reduction in Interest Rates: The RBI significantly reduced key interest rates to infuse

liquidity into the financial system and boost credit availability. The repo rate, which is the rate at

which banks borrow from the central bank, was reduced from 9% in July 2008 to 4.75% by April

2009 . The reverse repo rate, at which banks park excess funds with the RBI, was also reduced to

encourage lending.

2. Reduction in Cash Reserve Ratio (CRR): To further improve liquidity, the RBI cut the CRR

from 9% in August 2008 to 5% by January 2009 . This measure released substantial funds into

the banking system, allowing banks to lend more freely.

3. Special Liquidity Facilities: The RBI introduced various liquidity facilities, such as special

refinance facilities for banks and non-banking financial companies (NBFCs), to ensure that there

was sufficient liquidity for sectors like mutual funds and NBFCs, which were severely impacted

by the crisis .

Fiscal Policy Measures by the Government:

1. Stimulus Packages: The government of India announced three fiscal stimulus packages

between December 2008 and March 2009, amounting to approximately ₹1.86 lakh crore (around
3.5% of GDP at that time) . These packages focused on increasing public expenditure in

infrastructure projects, reducing excise duties, and providing tax reliefs to stimulate demand.

2. Increase in Public Investment: As part of the stimulus, the government increased public

investment in sectors such as infrastructure, rural development, and education to boost

employment and domestic consumption. Investments in projects like the National Rural

Employment Guarantee Scheme (NREGA) were scaled up .

3. Support for Export Sector: To support the export sector, which was hit hard by the global

recession, the government introduced measures like interest subvention (interest rate subsidies)

on export finance and increased the duty drawback rates (rebate of duties on export goods) to

make Indian exports more competitive in global markets .

4. Relaxation of Foreign Direct Investment (FDI) Norms: The government liberalized FDI

norms in various sectors, including telecom, insurance, and retail, to attract more foreign capital.

This helped provide much-needed liquidity and increased investor confidence in the Indian

economy .

Impact and Outcome:

These coordinated efforts helped stabilize the Indian economy, limiting the adverse effects of the

global recession. India's GDP growth, which had slowed to 6.7% in 2008-09 from 9% in

2007-08, began recovering in the following years, reaching 8.4% in 2009-10 . While India was

not immune to the global financial crisis, the prompt policy response by the government and the

RBI helped mitigate the impact and positioned the economy for a quicker recovery compared to

many other nations.By combining monetary easing, fiscal stimulus, and investment incentives,

India was able to protect itself from the worst effects of the financial crisis.
C0mparison with Other crisis

The 1991 Indian economic crisis was a significant turning point in India's economic history. It

marked a period of severe economic turmoil that compelled the Indian government to undertake

far-reaching economic reforms. Here's an overview of the crisis:

Background:

- In the late 1980s and early 1990s, India was facing multiple economic challenges, including

high fiscal deficits, balance of payments problems, and stagnant growth.

- The country was heavily reliant on foreign loans to finance its deficits, leading to a mounting

external debt burden.

Triggers:

1. Balance of Payments Crisis: A balance of payments crisis emerged due to the combination of

high import bills, declining export growth, and reduced foreign exchange reserves. India was

struggling to meet its external obligations.

2. Currency Depreciation: The Indian rupee came under pressure, leading to its depreciation

against major foreign currencies.

Key Events:

1. Liberalization and Reforms: In response to the crisis, the Indian government, under Prime

Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, initiated a series of

economic reforms in 1991.

Liberalization, Privatization, and Globalization. They aimed to liberalize the economy from

decades of strict government control and open up to global trade and investment.

3. Devaluation of Rupee: As part of the reforms, the Indian rupee was devalued to improve

export competitiveness and reduce the trade deficit.

4. Trade and Investment: The government eased trade restrictions, reduced import tariffs, and

encouraged foreign direct investment (FDI) to boost economic growth.

5. Industrial and Financial Sector Reforms: Industrial licensing requirements were relaxed,

and the financial sector underwent significant changes to encourage competition and efficiency.

Consequences:

- The reforms led to a transformation of India's economic landscape. They helped accelerate

economic growth, boost industrial productivity, and attract foreign investment.

- India's GDP growth rate, which had been hovering around 3-4% prior to the reforms, saw a

significant uptick in the following years.

Long-Term Impact:

- The 1991 crisis and subsequent reforms marked a shift away from the planned economy model

towards a more market-oriented approach.

- The reforms laid the foundation for India's economic growth in the following decades,

contributing to the country's emergence as a global economic player.

recognize the need for drastic economic changes. The reforms undertaken during this period had

a profound and lasting impact on India's economy, steering it towards a path of liberalization,

privatization, and globalization.

1997 Asian Financial Crisis:

The 1997 Asian financial crisis began in Thailand and quickly spread across Southeast Asia,

leading to the collapse of currencies, stock markets, and economic output. India remained

relatively unaffected due to its limited financial integration with East Asia at the time and

prudent capital controls. The Indian rupee did not undergo the massive devaluations seen in

Southeast Asia, though India’s export growth slowed.

Key Differences:

Currency Stability: In the 1997 crisis, the rupee remained relatively stable, while during the

2008 crisis, it depreciated sharply due to capital outflows.

Capital Controls: India’s capital controls in 1997 limited the inflow of short-term capital,

preventing the type of speculative attacks seen in Southeast Asia.

c. COVID-19 Economic Shock (2020)

The COVID-19 pandemic led to one of the worst economic contractions globally and in India

since independence. In 2020, India’s GDP contracted by 7.3% compared to the 2008 crisis’s

milder impact on GDP. Unlike the financial contagion of 2008, COVID-19 caused supply chain

disruptions, widespread job losses, and a collapse in domestic demand due to lockdowns.

Key Differences:
Supply vs. Demand Shock: COVID-19 was a supply-side and demand-side shock, with

restrictions on production and movement. The 2008 crisis was more of a financial sector issue.

Contraction Severity: The contraction in 2020 was sharper, highlighting the pandemic’s

extensive reach across all sectors, compared to the selective impact of 2008 on banking and

exports.

4. Conclusion: Lessons Learned from 2008 Crisis

India’s experience during the 2008 financial crisis emphasized the importance of:

Strong Regulatory Framework: The RBI’s conservative policies and regulation of financial

institutions helped insulate India from the worst effects of the crisis.

Diversified Economy: India’s relatively large domestic consumption base acted as a buffer

during the global slowdown.

Global Interdependence: The crisis revealed India’s increasing integration with global markets,

especially in terms of capital flows and exports.

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Research Done by:

Riya

Mehak Jindal

Kayana Agarwal