The 2008 Financial Crisis Explained

Past and present

In 2008, the financial crisis shook the global economy. Now ten years later, people are wondering how the rules have changed, and more importantly, how this type of economic crisis can be avoided in the future. 

What began as a crisis in regards to the subprime mortgage market, later developed into a large-scale, global financial crisis and recession. From massive bailouts to the resulting economic downturn, many are now questioning the stability and transparency of the global banking systems they previously trusted.

What happened during the financial crisis?

Referred to as the worst economic disaster since the Great Depression, the 2008 financial crisis devastated the world economy. This resulted in what's known as the Great Recession, which led to falling housing prices and sharp increases in unemployment. The associated repercussions were enormous, and are still influencing financial systems today. 

In the US, more than eight million citizens lost their jobs, approximately 2.5 million businesses were devastated, and close to four million homes were foreclosed in less than two years. From food insecurity to income inequality, many have lost faith in the system.

The recession officially ended in 2009, but many continued to suffer long after it, especially in the US. The unemployment rate reached 10% in 2009 and was only recovered to pre-crisis levels in 2016.

What caused the Great Recession?

In terms of the cause, numerous factors were to blame. The "perfect storm" was brewing and once it reached its breaking point, a financial crisis ensued. Financial institutions were giving out high-risk loans (mainly mortgages) that eventually resulted in a massive taxpayer-financed bailout. 

The true cause of the 2008 financial crisis is highly complex, but it was America's housing market that initiated a chain reaction - one that would expose cracks in the financial system. This was followed by the bankruptcy of the Lehman Brothers firm which had a crippling effect on the American and European economy. In turn, the episode made the public aware of the banks' potential shortcomings. It also caused significant disruptions around the world, based on how the global economy is interconnected.

Why does it matter today?

Although it has been a decade since the financial crisis hit, there are still concerns. The effects of this recession are still alive, and the global economic recovery has been fairly weak in comparison to historical standards. High-risk loans are being offered once again, and although default rates are low today, that could change very quickly. 

Regulators insist that the global financial system has been altered since 2008 and that safety measures have been considerably enhanced. For this reason, many believe that the global financial system is stronger today than it was a decade ago. 

On the other hand, some are still wondering: could this type of economic crisis happen again? The short answer is yes, anything is possible. Despite the many changes that were made and the new rules that were enforced, there are fundamental problems that remain. 

Noteworthy, the 2008 financial crisis reminds us that policy matters. The events that took place in 2008 were essentially caused by the decisions that regulators, politicians, and policymakers made years prior. From poorly controlled regulatory bodies to the impact of corporate culture, the Great Recession is anything but "in the past." 

The development of Bitcoin and other cryptocurrencies

While the rise of a financial crisis in 2008 highlighted some of the risks associated with the traditional banking system, 2008 was also the birth year of Bitcoin - the first cryptocurrency to be created.

In contrast to fiat currencies, such as the US dollar or British pound, Bitcoin and other cryptocurrencies are decentralized, which means they are not controlled by a national government or central bank. Instead, the creation of new coins is determined by a predefined set of rules (protocol).

The Bitcoin protocol and its underlying Proof of Work consensus algorithm ensure that the issuance of new cryptocurrency units follows a regular schedule. More specifically, the generation of new coins is reliant on a process known as mining. The miners are not only responsible for introducing new coins into the system but also for securing the network by verifying and validating transactions.

In addition, the protocol establishes a fixed max supply that guarantees there will only ever be a total of 21 million Bitcoins in the world. This means that there are no surprises when it comes to the current and future supply of Bitcoin. Moreover, the Bitcoin source code is open-source, so anyone is able to not only check it but also to contribute and participate in its development.

Closing thoughts

Although it has been a decade since the 2008 financial crisis, people have not forgotten how fragile the international banking system really is. We cannot be totally sure, but this is probably one of the reasons that led to the creation of a decentralized digital currency like Bitcoin.

Cryptocurrencies still have a long way to go, but they definitely represent a viable alternative for the traditional fiat system. Such an alternative economic network may bring financial independence where there is none, and certainly has the potential to create a better society going forward.