How Does a Global Market Crash Affect Wealth?

Global market crash

The Great Recession of 2007-2009 arose from the collapse of financial institutions in the United States. The failure of Lehman Brothers sparked a panic that spread to the rest of the world due to fears about the housing bubble and the subprime mortgage crisis. This sparked widespread selling in markets around the globe that led to a reduction in the value of equities (stocks) and commodities. Financial stresses also created concerns about the viability of banks and governments around the world. The lack of confidence caused businesses to delay investment and consumers to reduce spending. This created a recession that lasted about nine years, and millions of people lost their jobs and homes.

During this time of economic crisis, governments increased spending and pumped money into the economy to boost demand and provide support for ailing financial firms. They also guaranteed deposits and bank bonds and assumed ownership stakes in some financial firms to increase the liquidity of their assets. These measures helped prevent a complete collapse of the financial system, but the economic recovery was slower than in previous periods without a global financial crisis.

Research shows that when stock markets crash, personal wealth declines lead to psychological distress and a need for psychotherapy. Using data from the HRS, we find that respondents who own stocks and IRAs experience more pronounced decreases in non-housing wealth than those who do not have investments. However, our results show that the effect of the crash on wealth is isolated from the impact on non-stock asset holdings and other factors.