Deep Dive

What caused the 2008 recession?

Emma Nunes-Vaz
January 16, 2024

The 2008 recession, aka the global financial crisis, was the biggest economic downturn in the UK since World War II. With unemployment, debt and home repossession levels reaching new heights, it was caused by a number of factors which we are going to dive deeper into in today’s blog.

Mortgage crisis

Typically known as the ‘housing bubble’, In the years leading up to the recession, people were taking out loans to buy houses that they couldn’t afford. This is because banks were lending money to borrowers with poor credit histories (something that is less likely to happen in the modern day). Moreover, house prices were rising much faster than inflation which made the market extremely unstable. These individuals were known as subprime borrowers. When the housing market started to decline in 2007 and prices rose rapidly, many subprime borrowers couldn’t make their mortgage repayments. 

Failure of financial institutions

We mentioned it briefly before, but banks were lending money to people who couldn’t afford to pay it back…seriously?! They were also investing in risky assets and then when the housing bubble ‘burst’, many people defaulted on their loans and banks lost A LOT of money. Therefore, making it harder for businesses to get loans and invest. The failure of several major financial institutions was another major factor in the 2008 recession. It led to a loss of confidence in the financial system and made it difficult for businesses and consumers to borrow money, meaning people were unwilling to spend and even more unwilling to lend. This further depressed the economy.

Global economic slowdown

The 2008 recession didn’t just affect the UK, it was a global event. It had a knock-on effect on the UK economy, as other countries slowed down, the demand for UK goods and services fell. This led to job losses and businesses going bankrupt, contributing even more to the crisis.

But what does this mean?

To put it all simply, the housing market is booming and house prices are rising rapidly. Now, imagine you’re a bank and you are giving out loans to people wanting to buy a property, who may not be able to afford them. The housing market then crashes and prices fall sharply. The people you loaned money to are now unable to repay their loans and the bank goes bankrupt. This has a knock-on effect on the economy, as other banks then become more cautious about lending money to people. All of this, makes it difficult for businesses to invest and the economy slows down - Ta-da! A global financial crisis 😣