Crashed summary

As the crisis began to unfold, it became clear that European banks were in deep on some of the American financial sector’s riskiest lending practices. Not one to look on from the sidelines, the European banking industry had thrown itself into the US housing boom with gleeful abandon. If the banks didn’t have their own cash, they simply borrowed it from Wall Street lenders.

Huge sums of European money soon ended up in American mortgage securities. By 2008, a full quarter of all securitized US mortgages were held by foreign banks – most of them European. Meanwhile, European banks held 29 percent of high-risk securities. The British bank HSBC alone pumped a cool $70 billion into mortgages in the US before 2005.

Global financial markets couldn’t handle the 2008 housing crash. Soon enough, the whole system was imploding. By the end of the year, trade between the world’s wealthiest countries had fallen from $17 trillion to just over $1.5 trillion – the largest drop since the Great Depression. Over the winter starting that year, around 800,000 Americans lost their jobs every month.

The US government didn’t hang around to find out how much worse things could get. The Federal Reserve nationalized large parts of the mortgage finance system and launched a program of painful but increasingly effective quantitative easing. That’s essentially a policy of printing dollars and using them to buy up mortgage-backed securities in order to reassure anxious investors. All in all, the Reserve injected $1.85 trillion into the cash-starved banking system.

With major European leaders like Merkel unwilling to sacrifice political capital and extend debt relief to smaller members of the Eurozone, states like Greece and Ireland soon found themselves in over their heads.

It’s easy to see why. Take Ireland, a nation just half the size of New York City. Its leading banks had racked up debts worth more than 700 times as much as the country’s total GDP! As a bank run became more and more likely, the government stepped in and assured creditors that it would guarantee the debt of Ireland’s six largest banks. Keeping that promise was of course impossible, and attempting to do so bankrupted the state.

The recession didn’t just affect the Eurozone – it also spread into the former Eastern Bloc. Economic upheaval led to the reemergence of old tensions – above all in Ukraine – as Russia and the West competed for influence.

By the 2000s, the economies of ex-Eastern Bloc countries like Poland, Latvia and Estonia were heavily reliant on foreign investment. Take carmaking, for example. In the 1990s, 15 percent of European motor vehicle production was based in Eastern Europe, but 90 percent of the industry was foreign-owned. Caught in the middle of the historic rivalry between Russia and the West, these countries had to choose which side to draw that investment from: NATO in the West or the Russian-led Eurasian Customs Union.

The aftershock of the global crash was also felt in one of the EU’s largest non-Eurozone members: the UK. Its tremors undermined the foundations of London’s financial sector and changed the face of the country, possibly forever.

But before explaining that, let’s look at how London became the world’s number one financial hub in the first place. Between 1944 and 1971, the Bretton Woods Agreement regulated trading relationships between 44 countries. The system aimed to promote growth, simplify trade rules and reduce economic volatility, and one of its most essential parts concerned currency conversion.

With Brexit negotiations proving such a headache and so many gloomy forecasts about what’ll happen once they’re over, plenty of people have been asking themselves why the UK ever decided to leave the EU.

The answer has two facets. Firstly, there’s a long-standing tradition of Euroscepticism, both in the country as a whole and within the Conservative party in particular. There’s also a widespread worry that the EU will undermine London’s status as a global financial hub.

The legacy of the crash of 2008 was just as divisive on the other side of the Atlantic. The main sticking point? A growing sense among the recession’s victims that the people who caused the crisis didn’t just get off scot-free – they were actually rewarded.

In 2008, $18.4 billion in bonuses were paid out by Wall Street. Some of the most notorious executives in the business were among those cashing cheques that year.

Mounting resentment against the “establishment” finally boiled over in the 2016 US presidential election. Why did it take so long for alienated voters to vent their frustrations? Well, the 2012 elections hadn’t provided much of an outlet for disaffected Americans.

Obama had a few choice words to say about Wall Street bonuses back in 2009, but he’d always made it clear that his priority was to prop up rather than punish failing banks. That’s hardly surprising – his administration was packed with people like Larry Summers – the senior government economist and Wall Street alumni who’d dismissed Rajan’s warning before the crash.