People forget something about the last crisis though. In economic terms it wasn’t as bad as the Great Depression, apart from in Greece maybe.
Unemployment in the US, UK and other countries `only` went to about 10%, and GDP `only` went down by 4%-8% in most advanced countries. Less than the 10% needed to be classified as a depression.
The financial crisis of 2008 is considered to be the worst since The Great Depression of 1930s. There wasn’t any one factor that led to the economic collapse. It was a cascading effect that was triggered by banks, leading to a disruption in the realty sector. And the worms were out of the can, wrecking different ends of the economy, eventually bringing depression in 2009.
To know if that situation can arise again, we must first understand why and how it happened the last time. Here’s how it all happened…
Banks created a lot of money and gave loans. A large portion of this loan went to homebuyers. This created hype in the real estate sector. More and more people were now rushing to buy homes. The price of properties increased significantly. And debt in economy (or personal debts) grew to an extent that it became unpayable. Since people now couldn’t repay their loans, banks were in danger of going bankrupt. This caused a crisis.
Following, now bank limited their lending to individuals and businesses. This caused a slowdown in the economy and prices of various markets decreased. The people who borrowed money from banks on the speculation of the rise in price of their assets (or mortgage) now had to sell their assets. This led to the decrease in the prices of houses. This resulted in banks cutting their lending even further. And the worry turned into reality—the economy was tipped into recession.
Even with aggressive efforts from Federal Reserve and Treasury Department, the situation continued spiraling to worst. Only a handful of people anticipated an economic collapse like this. Raghuram Rajan, the former Chairman of Indian Reserve Bank was among these people.
Can a financial crisis like this happen again?
It’s hard to guess. The world has learned a lot from this event. Today, the whole financial crisis of 2008 is modeled to understand what went wrong and how it could have been prevented. So we are much more adept to identify any early signs of such crisis. The banks have become much wiser—and so has the government institutes.So no, as of right now, it doesn’t look like we’re going to have a Déjà vu of Financial Crisis 2008. But like the saying goes, never say never.