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Global Financial Crisis - What caused it and how the world responded

The credit crunch

The global financial crisis (GFC) or global economic crisis is commonly believed to have begun sometime in early to mid 2007 with a credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. This, in turn, resulted in the US Federal Reserve injecting a large amount of capital into financial markets. By September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile. Consumer confidence hit rock bottom as many investors tightened their belts in fear of what could lie ahead.

The sub-prime crisis and housing bubble

The housing market in the United States suffered greatly, as many homeowners who had taken out sub-prime loans found they were unable to meet their mortgage repayments. As the value of homes plummeted, a number of the borrowers found themselves with negative equity. With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on the market than they had loaned out originally. The banks had a liquidity crisis on their hands, and giving and obtaining home loans became increasingly difficult as the sub-prime lending bubble burst. This is commonly referred to as the credit crunch of 2007-08.

Although the housing collapse in the United States is commonly referred to as the trigger for the global financial crisis, some experts who have examined the events over the past few years, and indeed even politicians in the United States, believed that the financial system needed better regulation to discourage unscrupulous lending.

The global financial crisis entered a new phase

Major investment bank Lehman Brothers, which had subprime mortgage-backed securities, filed for bankruptcy on September 15, 2008. It was the fourth largest bank in the US at the time of its collapse which sparked a banking crisis in the US, Europe and across parts of Asia.

Governments around the world struggled to rescue giant financial institutions as the fallout from the housing and stock market collapse worsened. Many financial institutions continued to face serious liquidity issues. The Australian government announced the first of its stimulus packages aimed to jump-start the slowing economy.

The U.S. government proposed a $US700 billion rescue plan, which subsequently failed to pass because some members of US Congress objected to the use of such a massive amount of taxpayer money being spent to bail out Wall Street investment bankers (who were believed by some to be one of the causes of the global financial crisis).

By September and October of 2008, people began investing heavily in gold, bonds and US dollar or Euro currency, as these were seen as safer alternatives to the ailing housing and stock markets.

In January of 2009, newly-elected US President Barack Obama proposed federal spending of around $US800 billion in an attempt to improve the state of the financial crisis. The Australian Government also proposed another stimulus package, pledging to give cash handouts to tax payers, and spend more money on longer-term infrastructure projects.

Australia’s response to the global financial crisis – the first stimulus package

Australia’s then-Prime Minister, Kevin Rudd, and then-Treasurer, Wayne Swan, delivered their first budget in response to the global financial crisis, with the main objective being to fight inflation – a major problem in the local economy at the time.

In October 2008, the Rudd Government announced that it would guarantee bank deposits. With the economy facing a recession, an economic stimulus package worth $10.4 billion was announced. This included payments to seniors, carers and families. The payments were made in December 2008, just in time for Christmas spending, and retailers predominantly reported strong sales. The first home buyer’s grant was doubled to $14,000 for existing homes, and tripled to $21,000 for new homes.

The automotive industry was also given a helping hand, as consumer demand succumbed to the effects of the slowing economy.

The table below displays a snapshot of 5-Star home loan products on Canstar’s database with links to providers’ websites, sorted by the advertised interest rate (lowest-highest). The results and Star Ratings shown are based on a principal and interest first home buyers’ loan of $500,000 in NSW at a variable rate. Before deciding to commit to any home loan product, check upfront with your provider for details of the product, and to confirm whether it meets your needs.

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The crisis continued – a second stimulus package was announced

A second, even larger economic stimulus package was announced by the Australian Government in February 2009, with $47 billion allocated to help boost the economy. This included:

  • $14.7 billion for schools
  • $6.6 billion for 20,000 new homes
  • $3.9 billion to insulate 2.7 million homes
  • $890 million for road repairs and infrastructure
  • $2.7 billion in small business tax breaks
  • $12.7 billion for cash bonuses: $950 for every Australian taxpayer who earned less than $80,000, to be paid out in March and April 2009

Australia in the years since the GFC began.

Many experts have commented that the Australian economy was somewhat more insulated than other countries from the sub-prime issues surrounding the United States, meaning that Australia did not suffer as badly as some nations. Nevertheless, we were not immune.

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