The 2007-08 depression was the first major worldwide economic depression since the 1930 crash. The late 1990s Japanese asset bubble crisis comes close. It began like most of the previous crises. The real estate bubble burst when prices became unsustainable and resulted in mass unemployment and shutting down of firms. People took loans for houses and there was an increase in demand for such long term loans from banks. Banks stupidly tried to take advantage of this and started dealing in these loans. The major mistake by them was to disguise the high risk loans as low risk ones. They would couple the high risk mortgage loans with some low risk bond or security and would get a 'AAA' certification for it(meaning the investment was safe enough). This represented the lax mortgage lending standards prevalent at the time, especially in the US. People who couldn't pay the loans back were readily given these high risk death certificates.
Another reason for the rapid decline in economic activity were the numerous bank runs. People's confidence dwindled in the market as many people(including former governor of the Reserve Bank of India, Dr. Raghuram Rajan)predicted an economic meltdown. They rushed to their banks in a frenzy to withdraw funds but the banks ran short very quickly and had to sell their investments at a loss to cover the withdrawals. Many of them, including the famous Lehmann Brothers bank, had to close down.
This depression resembled many of the previous meltdowns in history, like the DotCom bubble of the early 2000s where the upcoming internet companies were so popular that their prices were being discussed at every dinner table, a sure sign that an asset bubble is about to burst. People, including central banks, are clueless about the economic 'yo-yo', where growth cannot continue forever and must eventually halt. The speculations during 2007 led to the the Minsky movement, after Hermann Minsky, which marked the transition point from a speculation to a crisis.
Another reason for the rapid decline in economic activity were the numerous bank runs. People's confidence dwindled in the market as many people(including former governor of the Reserve Bank of India, Dr. Raghuram Rajan)predicted an economic meltdown. They rushed to their banks in a frenzy to withdraw funds but the banks ran short very quickly and had to sell their investments at a loss to cover the withdrawals. Many of them, including the famous Lehmann Brothers bank, had to close down.
This depression resembled many of the previous meltdowns in history, like the DotCom bubble of the early 2000s where the upcoming internet companies were so popular that their prices were being discussed at every dinner table, a sure sign that an asset bubble is about to burst. People, including central banks, are clueless about the economic 'yo-yo', where growth cannot continue forever and must eventually halt. The speculations during 2007 led to the the Minsky movement, after Hermann Minsky, which marked the transition point from a speculation to a crisis.
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