Editing 2008 Financial Crisis (section)

= 2008 Financial Crisis =
The '''2008 financial crisis''' was a global economic collapse triggered by the bursting of the U.S. housing bubble, failures in financial regulation, excessive risk-taking by banks, and the widespread use of complex mortgage-backed securities.

== Remembering (Knowledge / Recall) 🧠 ==
Key facts, entities, and terminology.

=== Core terminology & definitions ===
* '''[https://wikipedia.org/wiki/2007%E2%80%932008_financial_crisis 2008 financial crisis]''' — Worldwide economic downturn originating in the U.S. housing and credit markets.
* '''[https://wikipedia.org/wiki/Subprime_mortgage_crisis Subprime mortgage crisis]''' — Surge in high-risk mortgage defaults beginning in 2007.
* '''[https://wikipedia.org/wiki/Mortgage-backed_security Mortgage-backed securities (MBS)]''' — Bonds backed by mortgage payments.
* '''[https://wikipedia.org/wiki/Collateralized_debt_obligation Collateralized debt obligations (CDOs)]''' — Structured financial products pooling debt assets.

=== Key components / actors / elements ===
* '''Financial institutions''' — Lehman Brothers, Bear Stearns, AIG, major commercial banks.
* '''Regulatory bodies''' — Federal Reserve, U.S. Treasury, SEC.
* '''Households & borrowers''' — Many with subprime or adjustable-rate mortgages.
* '''Global markets''' — Interbank lending, credit markets, international trade flows.

=== Canonical models, tools, or artifacts ===
* '''[https://wikipedia.org/wiki/Too_big_to_fail Too big to fail]''' doctrine.
* '''[https://wikipedia.org/wiki/Troubled_Asset_Relief_Program TARP]''' — U.S. bank rescue program.
* '''[https://wikipedia.org/wiki/Quantitative_easing Quantitative easing]''' — Expansionary monetary policy used by central banks.

=== Typical recall-level facts ===
* Lehman Brothers collapsed in September 2008.
* Triggered the Great Recession, the worst downturn since the 1930s.
* Housing prices fell sharply as adjustable-rate mortgages reset.

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== Understanding (Comprehension) 📖 ==
Conceptual relationships, mechanisms, and systemic context.

=== Conceptual relationships & contrasts ===
* Linked to the bursting of the U.S. housing bubble and credit expansion.
* Similar to earlier banking crises but amplified by complex financial products.
* Contrasts with the 1929 crash: modern, globally interconnected finance.

=== Core principles & paradigms ===
* '''Leverage and risk concentration''' magnified small shocks.
* '''Moral hazard''' shaped behavior under expectations of bailouts.
* '''Shadow banking''' increased systemic fragility outside traditional regulation.

=== How it works (high-level) ===
* '''Inputs''' — Cheap credit, relaxed lending standards, rising home prices.
* '''Processes''' — Securitization → risk mispricing → borrower defaults → asset collapse.
* '''Outputs''' — Liquidity freeze, bank failures, recession, global contagion.

=== Roles & perspectives ===
* '''Regulators''' — Attempted stabilization via liquidity injections.
* '''Banks''' — Sought profit through high-risk mortgage products.
* '''Consumers''' — Faced foreclosures, job losses, and wealth decline.
* '''Global partners''' — Experienced spillover through multinational finance.

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== Applying (Use / Application) 🛠️ ==
Modern uses of crisis lessons in finance, policy, and regulation.

=== "Hello, World" example ===
Analyzing a bank balance sheet for exposure to high-risk mortgage assets using simple ratios such as leverage or capital adequacy.

=== Core task loops / workflows ===
* Stress-testing financial institutions.
* Monitoring housing-market indicators (prices, delinquencies).
* Evaluating bank liquidity under adverse scenarios.
* Applying regulatory frameworks such as Basel III.

=== Frequently used actions / methods / techniques ===
* Scenario analysis of mortgage portfolios.
* Credit-risk modeling and default probability estimation.
* Liquidity coverage ratio assessment.
* Policy evaluation of monetary interventions.

=== Real-world use cases ===
* Central banks using quantitative easing during economic stress.
* Governments designing foreclosure-prevention programs.
* Financial firms improving risk-management practices.
* Economists modeling contagion effects in global markets.

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== Analyzing (Break Down / Analysis) 🔬 ==
Structural insights, comparisons, and root-cause investigation.

=== Comparative analysis ===
* Compared with the '''S&L crisis''' (1980s): far larger global impact.
* Differences from the '''COVID-19 recession''': financial vs. real-economy trigger.
* When securitization works well vs. when risk becomes opaque.

=== Structural insights ===
* Securitization chains obscured who bore final risk.
* Rating agencies’ incentives created misaligned assessments.
* Shadow banking lacked capital buffers of traditional banks.

=== Failure modes & root causes ===
* Over-leveraging by banks and investment firms.
* Flawed rating models assigning AAA to risky assets.
* Rapid rise in adjustable-rate mortgage defaults.
* Systemic interconnectedness amplifying localized shocks.

=== Troubleshooting & observability ===
* Indicators: rising delinquency rates, liquidity freezes, credit-spread spikes.
* Tools: stress-test results, housing-price indices, interbank lending rates (e.g., LIBOR–OIS spread).
* Questions: Where does risk reside? How correlated are asset classes?

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== Creating (Synthesis / Create) 🏗️ ==
Designing improved financial systems, regulations, and crisis-prevention tools.

=== Design patterns & best practices ===
* Transparent securitization structures with clearer risk mapping.
* Strong capital requirements and liquidity buffers.
* Better borrower vetting and mortgage-underwriting standards.
* Clearer communication from central banks to reduce panic.

=== Integration & extension strategies ===
* Integrating macroprudential policies into national regulatory systems.
* Coordinating cross-border supervision for multinational banks.
* Enhancing data-sharing between regulators and institutions.

=== Security, governance, or ethical considerations ===
* Conflicts of interest in rating agencies.
* Fairness in bailout decisions and moral-hazard concerns.
* Protections for vulnerable borrowers.
* Governance reforms for large, systemically important institutions.

=== Lifecycle management strategies ===
* Periodic review of financial regulations (e.g., Dodd–Frank provisions).
* Updating stress-test scenarios based on emerging risks.
* Monitoring climate-related financial risk and new asset classes.

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== Evaluating (Judgment / Evaluation) ⚖️ ==
Assessing impacts, trade-offs, and long-term implications.

=== Evaluation frameworks & tools ===
* Financial-stability metrics: capital ratios, liquidity indicators.
* Macroeconomic indicators: GDP recovery, unemployment, housing markets.
* Systemic-risk models evaluating contagion likelihood.

=== Maturity & adoption models ===
* Post-crisis reforms institutionalized (Basel III, stress tests).
* Debate continues on the adequacy and burden of regulations.
* Global adoption varies by country and political landscape.

=== Key benefits & limitations ===
* Benefits: stronger banking oversight, increased resilience.
* Limitations: uneven enforcement, persistent shadow-banking risks.

=== Strategic decision criteria ===
* Use strict regulation when systemic risk is high.
* Consider market flexibility when innovation is needed.
* Balance consumer protection with credit accessibility.

=== Holistic impact analysis ===
* Economic: deep recession, slow global recovery.
* Social: unemployment spikes, foreclosures, wealth inequality.
* Political: shifts toward financial reform and populist movements.
* Long-term: improved oversight but ongoing vulnerabilities in global finance.

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[[Category:Economics]]
[[Category:Financial Crises]]
[[Category:Global Recession]]
[[Category:21st Century History]]