Understanding Systemic Risk in Global Financial Markets

CHAPTER 3The Credit Crisis of 2007–2009

INTRODUCTION

During the Credit Crisis of 2007–2009 the failure or financial distress of many large global institutions caused reverberations across the global financial markets and economies, leading to deep recessions in the United States and continental Europe. Although the crises technically began in 2007, it wasn't until the Fall of 2008, with the failure, emergency bailout, or acquisition of some of the world's most recognizable firms such as Lehman Brothers, Bear Stearns, and American International Group Inc. (AIG), that the systemic impact of the crisis fully emerged.

This crisis has been referred to by several different labels, including the U.S. Subprime Crisis, the U.S. Housing Bubble, the Great Contraction, the Great Recession, the Global Credit Crisis, to name a few. Regardless of the name used, given the dramatic impact the event had on the global financial system and economies, this event is generally viewed as the worst financial crisis to occur since the Great Depression.

While in the years following the Credit Crisis many theories and opinions have emerged about its causes, it is generally acknowledged that the bursting of the U.S. residential housing bubble was the primary driver of this global financial meltdown. The U.S. residential housing market experienced a dramatic run-up in home prices between the years of 2000 and 2006, increasing by 100%, followed by a decline of over 30% during 2006–2010.¹ Dating all the way ...