A comparison between USA and Sweden of the Financial crisis 2008 

It was the 15th of September 2008 and the influential investment bank, Lehman Brothers went bankrupt. This was the beginning of the worst financial crisis since the great depression in 1929. This was the beginning of a crisis that led to a drastic increase in unemployment.

In 2006 the unemployment rate was at 4.7 percent according to the Bureau of Labor Statistics (BLS) and in 2009 it was at above 10 percent. In 2011 it was still at 10.75%. The housing market fell apart completely and the financial market froze causing complete chaos is not only in the US but globally.  The main reason that the crisis occurred when it did was that the accessibility to get a mortgage to buy a household before it could be really difficult to get a mortgage. But banks and lenders found a solution, called “Subprime loans” which basically means that banks and lenders package high-interest mortgages in packages and then sold them to investors who then loaned the money to people who regularly didn’t have the income or economy to loan money to buy houses. 

The stock market in Stockholm dropped almost 60% in one year and the Swedish currency (SEK) dropped almost 40% in less than a year to be in exact, between April 2008 and March 2009. The interest rate rose and just as in the US many banks needed to declare bankruptcy, one of the major banks in Sweden, Swedbank barely survived. No one was able to loan money, neither private persons or enterprises. So big enterprises needed to fire a lot of people and major enterprises that usually were trading internationally (Export and Import) needed to fire a lot of people to survive and lost a huge amount of their income. Over one day it was like everything that makes the world economy keep on going just stopped, it was like if you had a stopwatch you could press the stop button and as soon as you did that the whole world economy would collapse. In Sweden, the export sector was the one that got the biggest hit and only in the industry quickly 100-150 000 industrial jobs dissolved. In all of Sweden, Unemployment increased from just below six percent to closer to nine percent during the winter of 2009/2010 according to SCB. 

Sweden did a number of things to help the economy to recover. First of all the National bank in Sweden started pumping out money and then lowered the repo rate which slowly helped us recover. They also made it easier to lend money, one of which they allowed loans in other currencies then SEK, they changed their application form to get loans, for example, you could use other types of securities when you loaned money than you could before (security could be your real estate for example). This of course. got consequences and even today it affects us. When the government lowered the repo rate more people could loan money which led to people investing and buying things again. One of the things that went up in price was the housing market. But for the National bank, the interest rate is still negative and a lot of the people in Sweden are in debt. Today we have excess liquidity of 16 000 billion dollars in the world and it is way more than what we need and want in the world economy. This money flow combined with low-interest rates makes it a lot more difficult to handle if another crisis hits us. Sweden's economy is very dependent on its export of services and products, in fact, 44 percent of the countries GDP is from these kinds of services and products. On top of that around 1 tenth of the Swedish population works within this field.  We also have a big surplus in our international foreign commerce, we export a lot more than we import. 

Our big need for export makes us extremely vulnerable to events that happen outside of our nation's borders. The Baltic states were harshly affected by the financial crisis with huge drops in their GDP. At the same time, many of the Swedish banks were loaning out a lot of money to these countries so how the crisis affected the baltic also affected the stability of the financial system in Sweden.  To avoid to get affected in the financial system the national bank created and agreed to a so-called “swap deal” with the central banks in Lithuania and Estonia and provided them with financial support. During the crisis, the national bank agreed to the same kind of deal with the central bank of Iceland. the purpose of these deals was to offer short-termed financial support to shield the macroeconomic stability in all of the countries.

It is safe to say that the financial crisis in 2008 turned America upside down, everything everyone believed in was now in doubt, in many ways the American dream was damaged, the idea of that anyone, no matter of upbringing and setbacks can attain their own success. Owning your own home played a crucial role in the American Dream, the years from 2003 to 2006 a period of easy credit in the housing market via for example subprime lending led to more people being able to buy their dream homes. Despite the big rising in interest rates, had the backstop of capital gains meaning that if the people who had borrowed money for some reason we’re unable to pay back those high-interest loans they could sell their house for a profit. This, of course, was too good to be true and one day as expected the bubble would burst and it did. The housing market collapsed and almost 10 million Americans lost their homes. This did not only ruin the “American Dream” but also made the younger generation very skeptical. The truth is that the American Dream no longer exists, the dream that it doesn’t matter where you are from, your upbringing or your income you are able to own your own home. With the 2008 housing collapse and the economy back to full employment working-class families are not buying homes, they are swamped with debt and the wealth gap is increasing every day.

In the US today people are afraid of investing after the crisis, today about 60 % of all the Americans say they usually live from paycheck to paycheck, compared to 43% in 2007.

The Federal Reserve did several things to help alleviate the crisis. They lowered short-term interest rates to nearly 0 percent by early 2009, took additional steps to lower longer-term interest rates and measures to stimulate economic activity.

The Federal Reserve also bought a large number of treasury bonds and mortgage-backed securities that funded prime mortgages along with that the Federal Reserve also committed themselves to and I quote “purchasing long-term securities until the job market substantially improved and to keeping short-term interest rates low until unemployment levels declined, so long an inflation remained low.”  

However, there is still a number of different risk factors that give insecurity about whether or not the world and the USA have made the right measures to make sure another financial crisis hits us. Four factors that are important to take into consideration are;

The giant debt mountain. It is primarily one type of debt that is growing. The Student debt, and it’s more than twice what it was in 2008. Unfortunately, education is considered necessary if you want a good job but you need to spend a lot of money to get it and many people are in huge debt for most if not all of their lives.

Stock and Exchange market and social gaps. The third one is regulations that were made by Obama in 2010 to avoid another financial crisis are changed by Donald Trump.

The fourth one is the ability to take action, the states are vulnerable and if something would happen that the US can’t control internationally that could possibly make the whole finance sector to judder. There are simply not that many more tools to help stimulate the economy if something would happen and if help is needed. The critics mean that Trump's economical politics has put the US in a tough spot.

 

Sources:

Sandra, Johansson, “Risk för ny finanskris - fyra orosmoln att hålla koll på”, 15th of September 2018

https://www.svd.se/risk-for-ny-finanskris--fyra-orosmoln-att-ha-koll-pa

Accessed 18th December 2019

Investopedia, “How The 2008 Housing Crash Affected The American Dream”, 26th October 2017

https://www.investopedia.com/ask/answers/062515/how-was-american-dream-impacted-housing-market-collapse-2008.asp

Accessed 18th December 2019

John, V, Duca, “Subprime Mortgage Crisis” November 22 2013

 https://www.federalreservehistory.org/essays/subprime_mortgage_crisis

Accessed 18th December 2019

 

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