The 2008 Global Financial Crisis was the worst financial catastrophe since the Great Depression. It began with American subprime mortgages, spread through the global financial system via securitisation, and nearly collapsed the world economy. Here is the complete story — what happened, why, and what
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In the early 2000s, low interest rates and a booming housing market created a sense of optimism in the United States. Banks began offering mortgages to borrowers with poor credit histories, known as subprime mortgages. Because housing prices were constantly rising, lenders assumed these loans were safe. If a borrower couldn't pay, they believed the property could simply be sold for a profit. This created a cycle of aggressive lending and rising home prices, fueled by the belief that real estate values would never fall.
To make more money, banks took these individual home loans and bundled them together into complex investment products called Mortgage-Backed Securities (MBS). These bundles were sold to investors, pension funds, and banks around the world. These products were often rated as 'safe' by credit rating agencies, leading global financial institutions to pile into the market. This process, known as securitisation, meant that a default on a mortgage in a small town in America could now directly affect a bank in London or a retirement fund in Japan.
By 2006, housing prices peaked and began to decline. As interest rates rose, many subprime borrowers could no longer afford their monthly payments. Foreclosures skyrocketed, and the value of those bundled securities plummeted. Because these investments were held by banks and funds globally, the financial system suddenly found itself holding trillions of dollars in assets that were essentially worthless. The uncertainty caused banks to stop trusting each other, leading to a 'credit crunch' where lending effectively froze.
Confidence in the global financial system reached a breaking point on September 15, 2008, when the investment bank Lehman Brothers filed for bankruptcy. Lehman was a massive player in the housing market, and its collapse sent shockwaves through the global economy. Investors panicked, stock markets crashed, and big companies found themselves unable to borrow the short-term cash they needed to pay employees and suppliers. The fear was that the entire global banking system, which relies on the constant flow of money, would shut down entirely.
Governments and central banks were forced to intervene to prevent a total depression. They implemented massive rescue packages—often called bailouts—to keep major banks solvent and lowered interest rates to record lows to encourage borrowing. These actions eventually stabilized the markets, but the social and economic costs were immense. Millions lost their homes, unemployment rates soared, and global growth stalled for years. This crisis fundamentally changed how we regulate banks today, emphasizing the need for higher capital reserves to ensure that no single firm—or sector—can bring down the global economy again.