Does the financial crisis of 2007 have any link to the stock market crash of 2008?I am writing a paper for economics. I kind of understand the financial crisis but I'm confused, and I want to know...
Does the financial crisis of 2007 have any link to the stock market crash of 2008?
I am writing a paper for economics. I kind of understand the financial crisis but I'm confused, and I want to know if there is a link between the two.
To most people, the financial crisis started in 2008 at around the same time the stock market crashed.
If you are talking about a financial crisis in 2007, you are presumably talking about the first signs of the crisis -- the way that mortgage defaults started to go up, for example.
The connection between the two is that mortgage defaults led to the collapse or near collapse of a lot of big investing firms and banks. These institutions had a lot of money invested in bad mortgages or in securities that were based on the bad mortgages. When the mortgages started to default, these holdings started to lose their value.
As these big institutions started to collapse, people became very worried about the state of the whole economy. They started to sell stocks to try to get as much value as they could out of them before prices went down. That's how the stock market crashed.
It's important to remember that the stock market as an institution is based almost completely on confidence and fear. Does the fundamental information - earnings, cash on hand, P/E ratio, volatility - give an investor confidence or make them more nervous? When the financial crisis of 2007 revealed the cracks in our economy, especially in terms of the housing bubble and derivative trading, it made a lot of people nervous, and nervous about companies and stocks that were normally considered blue chip reliables. When sticks like Bear Stearns, Lehman Brothers and Fannie Mae started to tank, it took a lot of big money investors out of the market completely and accelerated the decline.