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Panic of 2008

Definition: Panic of 2008


The uncertain nature of the global economy will likely continue for some time, but the unraveling of investment banking and the drastic market sell-off in the following weeks has already been given a name — the Panic of 2008.

The panic in the US is playing out the effects of cheap money that encouraged consumer borrowing and subprime mortgage lending that gave home buyers access to loans they could not afford, driving the housing market into an unsustainable bubble. Financial institutions made bad bets on the housing market and ended up with worthless assets that had to be written off in quantities disproportionately large for the capital reserves maintained by these banks.

Investors were spooked by the news that banks were in trouble and began to sell off their shares in financial service investments, while banks stopped lending to each other because there was minimal collateral to back those loans. Banks began to fail and the government stepped in to bail out Freddie Mac, Fannie Mae, and AIG, and passed a historic $700 billion bank bailout. The big bailout has yet to instill investor confidence and the panicked public has continued to pull their money from the stock market, causing the Dow to perform very poorly over the last few weeks with no sign of a turn-around soon.

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