2008 Financial Crisis for Dummies: The Causes and the Consequences

Living through history makes it hard to understand the causes and effects. If you experienced the Great Recession of 2008, you know how it felt. Figuring out what caused it is a different story.

Are you wondering what happened 12 years ago to cause such a devastating economic downturn? The roots of the changes are far-reaching, but looking at the events and the underlying causes can help you figure out how it happened.

Here’s a brief explanation of the 2008 financial crisis for dummies.

Understanding: The 2008 Financial Crisis for Dummies

What really happened 12 years ago? You probably remember that it seems like overnight everyone was out of work and companies were laying people off. You remember having trouble making ends meet for a while and hearing tragic stories.

It was a huge blow to the U.S. and the world’s economic system, one of the largest since the Great Depression of 1929. Although that crisis didn’t move to global markets as quickly, there are some parallels. Marked by the closing of the investment bank Lehman Brothers in September of 2008, the recession had causes that stretched well before that day.

What Caused the Great Recession of 2008?

The market was unstable. Everyone was able to get approved for credit, even if they couldn’t afford it financially. From mortgage approvals to lines of credit, everyone bought things on credit.

That means the real money flow dried up, as more people bought on credit instead of actual funds. Inflation grew, and people started making conjectures about oil prices. There was also higher unemployment, which drives up inflation, too.

When financial institutions give credit, it’s based on capital, usually your home. Yet homes began to lose value. If your home isn’t worth as much, or you’re foreclosed and no longer have your home, the creditors have no way to collect the money you owe.

Effects of History

Similar recessions in the 80s (property prices crashed) and 90s (worldwide currency crises) showed the world what a recession of these proportions could look like. Yet it still came as a shock to many when it finally hit in 2008, affecting the world much faster than the Great Depression did.

The recession of 2008 shaped generations and how they respond to emergencies and financial problems, especially millennials. You can read more here. One of the reasons they cite is a huge drop in the cost of homes.

That means everyone’s real estate investments, even if it’s only one house (the one you live in) was worth significantly less, instead of appreciating as it should. Corporate losses also hit us hard, as companies struggled to recover and employees felt the effects.

If you experienced setbacks in your career back then, you may still be seeing the results. Your salary might not yet have grown back to where it would have been without the Great Recession. Over a lifetime, some estimates say it will cost about $70,000 for every American.

Moving Forward

Summaries and evals can explain the 2008 financial crisis for dummies. Yet you can move forward with your financial decisions to help combat the long-lasting effects of the recession.

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