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  • Writer's pictureHai Xiang

The Ripple Effect in the Aftermath of the 2008 Sub-prime crisis

1. The mortgage industry in the US was a house of cards waiting to collapse. The 2008 financial crisis is due to the subprime crisis if the house mortgage industry, which can be dated back to the 1970s, when the US lending markets were first deregulated, making the industry both lucrative and risky.

Investors are optimistic in the house prices (that will continue to go up), mortgages are given in a more simple way, which includes bad credit borrowers.

"Securitization – banks bundle these not so good mortgages together and sell shares in these bundles. The idea is that even some default on their mortgages, as long as the majority honours their mortgages, the investors are fine."

In 2008, house owners systematically default on their mortgages and the house price plummeted. Lehman Brothers was the first to default on September 2008, since 2/3 of its securities were in subprime mortgages.

2. The European financial crisis was a direct consequence of the US crash. By 2008, a full quarter of all securitized US mortgages were held by foreign banks, most of them are European banks. European banks held 29% of the high risk securities European banks have higher leverage (ratio of money borrowed and that of directly held), which accounts to almost 40:1. This means the banks have no enough cash to honour their borrowing. By that time, the entire European banks are short of 1.1 to 1.3 trillion to cover what they were lending. Banks are locking customers accounts to prevent withdrawal, which causes panic.

3. The Eurozone failed to emulate the successful response of the US. By the end of 2008, the trade between the world’s wealthiest countries had fallen from $17 trillion to just over $1.5 trillion. 800,000 Americans lost their jobs every month. The Federal Reserve nationalised large parts of the mortgage finance system and launched quantitative easing policy (to print more money to buy up mortgage-backed securities in order to reassure anxious investors.

By introducing the quantitative-easing policy, Economic lightweight like Greece could borrow at the same rate as the powerhouse Germany, which is harder for the former to repay. Reason Germany against a universal quantitative-easing policy in the eurozone: election related. It cannot allow the tax paid by its voters to support other countries like Greece and Ireland.

"German in history does not want to help the weak. Just like after the fall of the Berlin Wall, the West has to support the East, which incurs resentfulness. So each countries inside the eurozone has to fend their own crisis as a result."

4. Lack of unity meant that smaller countries could not cope with the consequences of the 2008 crash. As a result, IMF steps in to break the deadlock. The US administration also wades in since a continuously weak eurozone will weaken the recovery of the US economy. Austerity measures are introduced. For example, raise the VAT and retirement age, while public sector jobs and pay were slashed.

The threat of economic contagion had been averted, but the political effects of crushing austerity would reverberate for years to come.

5. Russia exploited the economic vulnerability of the former Eastern Bloc, pitting it against the West. Poland applies to join NATO, which set examples to other Eastern European countries. When countries like Ukraine face challenges in its supporting industries (like steel), The West and Russia are competing to wade in and increase control in the above said industries. Ukraine ended up on Russia’s side. But the president then fleeted the country in face of nation-wide protests. Soon after this, the IMF-EU deal was signed.

In response, the Russia refused to recognize the government and dispatched troops to annex the Crimean peninsula in the south and support Ukrainian separatists.

6. London lost its status as a global trading hub after the crash. After the Bretton Woods System, the US Federal Reserve and Treasury becomes more regulated compared to prior-war. US is now connected with gold (so nothing much can be done to US dollar)

"As such, global investors are searching for less regulated place to gamble bigger investment (in return for bigger profit). London becomes the one. Thus UK becomes the global center of borrowing and lending. (thus why LIBOR is settled in the UK)."

In the future, the Brexit and the scar of the financial crisis will increase America-Asia trading volume, bypassing London.

7. The Brexit referendum was initially a way of forcing the EU to protect London’s status as an offshore hub. Reason of Brexit: (1) long-lasting Euroscepticism: that EU will undermine its status as global financial center; (2) Following the austerity economic policy, the general public needs a scapegoat > the immigrants from Eastern Europe.

8. Angry American voters abandoned the political center as a result of the financial crisis. After the financial crisis in 2008, trauma continues, the victims believe the ones who cause the crisis were not penalized, but rewarded. (the relief payment goes to the executives that cause the crisis)

9. Anger at the unequal division of pain and profit in the post-crash US spread to the ballot box


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