The digital era · 2000–today
2008
The global financial crisis
Mortgage losses bring down Lehman Brothers, and governments bail out banks.
Banks had borrowed heavily against mortgage investments. When US house prices fell, losses spread, and Lehman Brothers failed on 15 September 2008.
In October, Congress approved the $700 billion TARP rescue, and in November the Fed began buying huge amounts of bonds. The rescues stopped the panic but raised worries about rewarding risk-taking.
💡 Why it made sense then
Letting big banks collapse risked freezing credit for everyone, so governments chose to rescue them.
Ideas it gave us
- 🏦 Bailout
A bailout is when a government or central bank gives money to a failing company or bank to keep it from collapsing, usually because its failure would hurt the wider economy.
- 🏦 Moral hazard
Moral hazard is the tendency to take more risk when someone else bears the cost if things go wrong, such as a bank expecting a bailout or a driver who is fully insured.
- 🎯 Leverage
Leverage is using borrowed money to increase the size of an investment, which magnifies both gains and losses.
- 🌍 Quantitative easing
Quantitative easing is when a central bank creates money to buy large amounts of bonds, pushing long-term interest rates down to support the economy when short-term rates are already near zero.
Practise with $10,000 in play money
Free. No real money involved.