Your guide to the 2008 financial crisis, including expert analysis from...

  • Martin Daunton, emeritus professor of economic history at the University of Cambridge
  • Scott Newton, emeritus professor of modern British and international history at the University of Cardiff
  • Dr Linda Yueh, an economist at Oxford University and London Business School

What was the 2008 financial crisis?

The 2008 crash was the greatest jolt to the global financial system in almost a century – it pushed the world's banking system towards the edge of collapse.

Within a few weeks in September 2008, Lehman Brothers, one of the world's biggest financial institutions, went bankrupt; £90bn was wiped off the value of Britain's biggest companies in a single day; and there was even talk of cash machines running empty.

The Lehman Brothers' headquarters
The Lehman Brothers' name is illuminated at the headquarters of Lehman Brothers Holdings Inc. in New York City, 15 September 2008. (Photo by Mario Tama/Getty Images)

When did it begin?

On 15 September 2008, Lehman Brothers [a Wall Street investment bank] filed for bankruptcy. This is generally considered to be the day the economic crisis began in earnest. The then-president George W Bush announced that there would be no bail-out. “Lehmans, one of the oldest, richest, most powerful investment banks in the world, was not too big to fail,” says the Telegraph.

What caused the 2008 financial crash?

The 2008 financial crash had long roots but it wasn't until September 2008 that its effects became apparent to the world.

More like this

The immediate trigger was a combination of speculative activity in the financial markets, focusing particularly on property transactions – especially in the USA and western Europe – and the availability of cheap credit, says Scott Newton, emeritus professor of modern British and international history at the University of Cardiff.

“There was borrowing on a huge scale to finance what appeared to be a one-way bet on rising property prices. But the boom was ultimately unsustainable because, from around 2005, the gap between incomes and debt began to widen. This was caused by rising energy prices on global markets, leading to an increase in the rate of global inflation.

A row of ‘For sale’ and ‘To let’ signs
A row of ‘For sale’ and ‘To let’ signs stand outside a housing development in Salford, Greater Manchester, 26 November 2008. (Photo by Christopher Furlong/Getty Images)

“This development squeezed borrowers, many of whom struggled to repay mortgages. Property prices now started to fall, leading to a collapse in the values of the assets held by many financial institutions. The banking sectors of the USA and the UK came very close to collapse and had to be rescued by state intervention.”

“Excessive financial liberalisation from the late 20th century, accompanied by a reduction in regulation, was underpinned by confidence that markets are efficient,” says Martin Daunton, emeritus professor of economic history at the University of Cambridge.

Where did the crisis start?

“The crash first struck the banking and financial system of the United States, with spill-overs into Europe,” Daunton explains. “Here, another crisis – one of sovereign debt – arose from the flawed design of the eurozone; this allowed countries such as Greece to borrow on similar terms to Germany in the confidence that the eurozone would bail out the debtors.

“When the crisis hit, the European Central Bank refused to reschedule or mutualise debt and instead offered a rescue package – on the condition that the stricken nations pursued policies of austerity.”

A big Euro logo
A huge Euro logo stands in front of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, 9 April 2009. (Photo by Ralph Orlowski/Getty Images)

Was the 2008 financial crisis predicted?

A number of economists claim to have predicted or anticipated the 2008 crisis.

Back in 2003, as editor of The Real World Economic Outlook, the UK-based author and economist Ann Pettifor predicted an Anglo-American debt-deflationary crisis. This was followed by The Coming First World Debt Crisis (2006), which became a bestseller after the global financial crisis.

But, Newton explains, “the crash caught economists and commentators cold because most of them have been brought up to view the free market order as the only workable economic model available. This conviction was strengthened by the dissolution of the USSR, and China's turn towards capitalism, along with financial innovations that led to the mistaken belief that the system was foolproof.”

Was the 2008 financial crisis unusual in being so sudden and so unexpected?

“There was a complacent assumption that crises were a thing of the past, and that there was a 'great moderation' – the idea that, over the previous 20 or so years, macroeconomic volatility had declined,” says Daunton.

“The variability in inflation and output had declined to half of the level of the 1980s, so that the economic uncertainty of households and firms was reduced and employment was more stable.

A trader on the floor of the New York Stock Exchange in 2008
A trader on the floor of the New York Stock Exchange, 15 September 2008. (Photo by Spencer Platt/Getty Images)

“In 2004, Ben Bernanke, a governor of the Federal Reserve who served as chairman from 2006 to 2014, was confident that a number of structural changes had increased economies' ability to absorb shocks, and also that macroeconomic policy – above all monetary policy – was much better in controlling inflation.

“In congratulating himself for the Fed's successful managing of monetary policy, Bernanke was not taking account of the instability caused by the financial sector (and nor were most of his fellow economists). However, the risks were apparent to those who considered that an economy is inherently prone to shocks.”

Newton adds that the 2008 crisis “was more sudden than the two previous crashes of the post-1979 era: the property crash of the late 1980s and the currency crises of the late 1990s. This is largely because of the central role played by the banks of major capitalist states. These lend large volumes of money to each other as well as to governments, businesses and consumers.

“Given the advent of 24-hour and computerised trading, and the ongoing deregulation of the financial sector, it was inevitable that a major financial crisis in capitalist centres as large as the USA and the UK would be transmitted rapidly across global markets and banking systems. It was also inevitable that it would cause a sudden drying up of monetary flows.”

How closely did the events of 2008 mirror previous economic crises, such as the Wall Street Crash of 1929?

There are some parallels with 1929, says Newton, “the most salient being the reckless speculation, dependence on credit, and grossly unequal distribution of income.

“However, the Wall Street Crash moved across the globe more gradually than its counterpart in 2007–08. There were currency and banking crises in Europe, Australia and Latin America but these did not erupt until 1930–31 or even later. The US experienced bank failures in 1930–31 but the major banking crisis there did not occur until late 1932 into 1933.”

A front page of a newspaper
The front page of the Brooklyn Daily Eagle newspaper with the headline 'Wall St. In Panic As Stocks Crash', published on the day of the initial Wall Street Crash of 'Black Thursday', 24 October 1929. (Photo by FPG/Hulton Archive/Getty Images)

Dr Linda Yueh, an economist at Oxford University and London Business School, adds: “Every crisis is different but this one shared some similarities with the Great Crash of 1929. Both exemplify the dangers of having too much debt in asset markets (stocks in 1929; housing in 2008).”

Highlighting distinctions between the two crises, Daunton says: “Crises follow a similar pattern – overconfidence succeeded by collapse – but those of 1929 and 2008 were characterised by different fault lines and tensions. The state was much smaller in the 1930s (constraining its ability to intervene) and international capital flows were comparatively tiny.

“There were also differences in monetary policy. By abandoning the gold standard in 1931 and 1933, Britain and America regained autonomy in monetary policy. However, the Germans and French remained on gold, which hindered their recovery.

“The post-First World War settlement hampered international co-operation in 1929: Britain resented its debt to the United States, and Germany resented having to pay war reparations. Meanwhile, primary producers were seriously hit by the fall in the price of food and raw materials, and by Europe’s turn to self-sufficiency.”

How did politicians and policymakers try to ‘solve’ the 2008 financial crisis?

Initially, policymakers reacted quite successfully, says Newton. “Following the ideas of [influential interwar economist] John Maynard Keynes, governments didn't use public spending cuts as a means of reducing debt. Instead, there were modest national reflations, designed to sustain economic activity and employment, and replenish bank and corporate balance sheets via growth.

“These packages were supplemented by a major expansion of the IMF's resources, to assist nations in severe deficit and offset pressures on them to cut back which could set off a downward spiral of trade. Together, these steps prevented the onset of a major global slump in output and employment.

“By 2010, outside the USA, these measures had been generally suspended in favour of ‘austerity’, meaning severe economies in public spending. Austerity led to national and international slowdowns, notably in the UK and the eurozone. It did not, however, provoke a slump – largely thanks to massive spending on the part of China, which, for example, consumed 45 per cent more cement between 2011 and 2013 than the US had used in the whole of the 20th century.”

Daunton adds: “Quantitative easing worked in stopping the crisis becoming as intense as in the Great Depression. The international institutions of the World Trade Organisation also played their part, preventing a trade war. But historians might look back and point to grievances that arose from the decision to bail out the financial sector, and the impact of austerity on citizens' quality of life.”

What were the consequences of the 2008 financial crisis?

In the short term, an enormous bail-out – governments pumping billions into stricken banks – averted a complete collapse of the financial system. In the long term, the impact of the crash has been enormous: depressed wages, austerity and deep political instability. Ten years on, we're still living with the consequences.

Financial crisis glossary

Asset markets refer to classes of assets – houses, equities, bonds – each of which is traded with similar regulations and behaviour.

Debt-deflation is the process by which, in a period of falling prices, interest on debt takes an increasing share of declining income and so reduces the amount of money available for consumption.

The Gold Standard fixed exchange rates by the amount of gold in their currencies. As a result, it was not possible to vary exchange rates to solve a balance of payments (the difference between payments into and out of a country) deficit, and instead costs were driven down and competitiveness restored by deflationary policies.

The International Monetary Fund is an organisation created in 1944 which now concentrates on structural reform of developing economies and resolving crises caused by debt.

Macroeconomics refers to the behaviour and performance of the economy as a whole, by considering general economic factors such as the price level, productivity and interest rates.

Monetary policy uses the supply of money and interest rates to influence economic activity. This is in contrast to fiscal policy which depends on changes in taxation or government spending.

Mutualisation of debt entails moving from a government bond that is the responsibility of a single member of the eurozone to make it the joint responsibility of all members.

Quantitative easing is the process by which a central bank purchases government bonds and other financial assets from private financial institutions. The institutions selling assets now have more money and the cost of borrowing is reduced. Individuals and businesses can borrow more, so boosting spending and increasing employment – though it is also possible that, when this process was employed, money went into buying equities, so boosting the gains of richer people.

Reflation refers to the use of policies that are employed to boost demand and increase the level of economic activity by increasing the money supply or reducing taxes, and so breaking the debt-deflation cycle.

Sovereign debt is the debt of national governments, with interest and repayment secured by taxation. If debt was too high, the country might default. This became a risk in 2010, above all in Greece.

This article was compiled from a feature in the October 2018 issue of BBC History Magazine which interviewed a panel of experts...

Martin Daunton, emeritus professor of economic history at the University of Cambridge and co-editor of The Political Economy of Public Finance (Cambridge, 2017)

Scott Newton, emeritus professor of modern British and international history at the University of Cardiff and author of The Reinvention of Britain 1960–2016: A Political and Economic History (Routledge, 2017)


Dr Linda Yueh, an economist at Oxford University and London Business School and author of The Great Economists: How Their Ideas Can Help Us Today (Viking, 2018)