Stock market crash

Definition

A stock market crash is a sudden, sharp decline in stock prices across a significant cross-section of a stock market, often triggered by panic selling and leading to widespread economic repercussions. Such crashes can result in severe financial losses for investors and erode confidence in the financial system. The 2008 financial crisis was characterized by a notable stock market crash that had lasting impacts on the global economy.

5 Must Know Facts For Your Next Test

1. The stock market crash of 2008 saw major indices like the Dow Jones Industrial Average drop significantly, with the Dow falling nearly 800 points on September 29, 2008, alone.
2. Investor panic was fueled by the collapse of major financial institutions, including Lehman Brothers, leading to a crisis of confidence in the banking sector.
3. Government interventions, such as the Troubled Asset Relief Program (TARP), were implemented to stabilize the financial system and restore investor confidence after the crash.
4. The aftermath of the stock market crash led to increased regulation of financial markets and institutions, including reforms aimed at preventing similar crises in the future.
5. The global nature of the financial system meant that the effects of the 2008 stock market crash were felt worldwide, causing recessions in many countries and altering international trade dynamics.

Review Questions

• How did the stock market crash contribute to the onset of the Great Recession?
  • The stock market crash played a crucial role in triggering the Great Recession by eroding investor confidence and leading to significant declines in consumer spending and investment. As stock prices plummeted, many households experienced substantial losses in their investments and retirement accounts, which decreased their overall wealth. This decline resulted in reduced consumer spending, which is a critical driver of economic growth, thereby amplifying the economic downturn.
• Evaluate the immediate impacts of the stock market crash on financial institutions and government policy responses during the Great Recession.
  • The immediate impacts of the stock market crash on financial institutions were profound, leading to insolvencies and requiring government intervention to stabilize the banking sector. Major banks faced significant losses due to their exposure to toxic assets linked to subprime mortgages. In response, policymakers implemented measures like TARP to purchase distressed assets from banks, injecting capital into the financial system and aiming to restore trust among investors. These actions underscored the interconnectedness of financial markets and highlighted the need for regulatory reform.
• Analyze how the stock market crash reshaped regulatory frameworks within financial markets post-2008.
  • The stock market crash of 2008 led to a fundamental reshaping of regulatory frameworks within financial markets as policymakers sought to prevent future crises. Key reforms included the Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduced stricter oversight of financial institutions, enhanced transparency in derivatives trading, and established mechanisms for winding down failing banks without taxpayer bailouts. This shift not only aimed at mitigating systemic risks but also sought to rebuild public trust in financial systems that had been severely damaged by the crash.

Related terms

Great Recession:

The Great Recession refers to the severe worldwide economic downturn that occurred from late 2007 to mid-2009, marked by significant declines in consumer wealth, severe disruptions in financial markets, and rising unemployment.

Subprime Mortgage Crisis: The Subprime Mortgage Crisis was a nationwide financial crisis that occurred between 2007 and 2010, triggered by a high number of mortgage defaults and foreclosures, leading to the collapse of housing prices and significant losses for financial institutions.

Bear Market: A bear market is a period in which stock prices fall by 20% or more from their recent highs, often associated with widespread pessimism and negative investor sentiment.