2008 Husing Market Crash Happeing Again

A trader works on the flooring of the New York Stock Commutation on September 15, 2008 in New York City. In afternoon trading the Dow Jones Industrial Boilerplate fell over 500 points equally U.S. stocks suffered a steep loss later on news of the financial firm Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection.

Spencer Platt/Getty Images

The warning signs of an epic financial crisis were blinking steadily through 2008—for those who were paying shut attention.

One clue? According to the ProQuest newspaper database, the phrase "since the Great Depression" appeared in The New York Times nearly twice as often in the first viii months of that year—about ii dozen times—every bit it did in an entire ordinary yr. As the summer stretched into September, these nervous references began to noticeably accumulate, speckling the broadsheet columns like a first, warning sprinkle of ash earlier the ruinous arrival of wildfire.

In mid-September catastrophe erupted, dramatically and in full public view. Financial news became front-folio, top-of-the-hour news, as hundreds of dazed-looking Lehman Brothers employees poured onto the sidewalks of 7th Avenue in Manhattan, clutching office furnishings while struggling to explain to the swarming reporters the shocking turn of events. Why had their venerable 158-year-old investment banking house, a barrier of Wall Street, gone bankrupt? And what did it mean for most of the planet?

The superficially equanimous assessments that emanated from Washington policymakers added no clarity. The secretary of the treasury, Hank Paulson, had—reporters said—"ended that the fiscal organization could survive the collapse of Lehman." In other words, the U.S. government decided not to engineer the firm'due south salvation, equally it had for Lehman'due south competitor Merrill Lynch, the insurance giant American International Grouping (AIG) or, in the leap of 2008, the investment depository financial institution Carry Stearns.

Lehman, they thought, was non also big to neglect.

Then-President George W. Bush had no explanations. He could merely urge fortitude. "In the curt run, adjustments in the fiscal markets can be painful—both for the people concerned about their investments and for the employees of the affected firms," he said, attempting to quell potential panic on Main Street. "In the long run, I'one thousand confident that our uppercase markets are flexible and resilient and tin deal with these adjustments." Privately, he sounded less sure, saying to advisors, "Someday you guys are going to need to tell me how we ended up with a organization like this.… We're not doing something correct if we're stuck with these miserable choices."

And because that organization had go a globally interdependent one, the U.Due south. fiscal crunch precipitated a worldwide economic plummet. And so…what happened?

The American Dream was sold on too-piece of cake credit

The 2008 financial crisis had its origins in the housing market, for generations the symbolic cornerstone of American prosperity. Federal policy conspicuously supported the American dream of homeownership since at least the 1930s, when the U.S. regime began to back the mortgage marketplace. It went further afterwards WWII, offering veterans cheap home loans through the G.I. Bill. Policymakers reasoned they could avert a return to prewar slump conditions and then long as the undeveloped lands around cities could fill with new houses, and the new houses with new appliances, and the new driveways with new cars. All this new ownership meant new jobs, and security for generations to come.

Fast forwards a half-century or so, to when the mortgage market was blowing up. Co-ordinate to the Terminal Study of the National Commission on the Causes of the Financial and Economical Crisis of the Usa, between 2001 and 2007, mortgage debt rose most as much as it had in the whole residual of the nation's history. At about the aforementioned time, domicile prices doubled. Effectually the country, armies of mortgage salesmen hustled to get Americans to infringe more than money for houses—or even just prospective houses. Many salesmen didn't ask borrowers for proof of income, chore or assets. Then the salesmen were gone, leaving behind a new debtor holding new keys and maybe a faint suspicion that the deal was too good to exist truthful.

Mortgages were transformed into always-riskier investments

The salesmen could make these deals without investigating a borrower's fitness or a property'southward value because the lenders they represented had no intention of keeping the loans. Lenders would sell these mortgages onward; bankers would bundle them into securities and peddle them to institutional investors eager for the returns the American housing market had yielded so consistently since the 1930s. The ultimate mortgage owners would often be thousands of miles away and unaware of what they had bought. They knew only that the rating agencies said information technology was every bit safe as houses e'er had been, at least since the Depression.

The fresh 21-century involvement in transforming mortgages into securities owed to several factors. After the Federal Reserve Organization imposed depression interest rates to avert a recession after the September 11, 2001 terrorist attacks, ordinary investments weren't yielding much. And then savers sought superior yields.

To meet this demand for higher returns, the U.S. fiscal sector developed securities backed by mortgage payments. Ratings agencies, like Moody'south or Standard and Poor'due south, gave high marks to the processed mortgage products, grading them AAA, or as skillful as U.S. Treasury bonds. And financiers regarded them as reliable, pointing to data and trends dating back decades. Americans almost always made their mortgage payments. The only trouble with relying on those information and trends was that American laws and regulations had recently changed. The financial surroundings of the early on 21st century looked more than similar the The states before the Depression than after: a country on the brink of a crash.

An employee of Lehman Brothers Holdings Inc. conveying a box out of the visitor's headquarters afterward it filed for defalcation.

Chris Hondros/Getty Images

Post-Low banking company regulations were slowly chipped away

Curlicue to Go on

To preclude the Peachy Depression from ever happening again, the U.S. government subjected banks to stringent regulation. Franklin Roosevelt had campaigned on this issue every bit part of his New Deal in 1932, telling voters his administration would closely regulate securities trading: "Investment cyberbanking is a legitimate concern. Commercial cyberbanking is another wholly divide and distinct concern. Their consolidation and mingling is contrary to public policy. I advise their separation."

He and his party kept this promise. Beginning, they insured commercial banks and the savers they served through the Federal Deposit Insurance Corporation (FDIC). Then, with the Banking Act of 1933 (a.thousand.a. the Glass-Steagall Act), they separated these newly secure institutions from the investment banks that engaged in riskier financial endeavors. For decades afterward, such restrictive regulation ensured, as the adage went, that bankers had only to follow dominion 363: pay depositors 3 percent, accuse borrowers 6 percent, and hit the golf course by 3 p.grand.

This steady state persisted until the latter 1970s, when politicians hoping to jolt a stagnant economy pushed deregulation. Over several decades, policymakers eroded Glass-Steagall separations. Most of what remained was repealed in 1999 past act of Congress, assuasive big commercial banks, affluent with the deposits of savers, to lumber into parts of the fiscal business organisation that had, since the New Deal, been the province of the smaller, more specialized investment banks.

Investment banks jumped neck-deep into risk

These nimbler firms, crowded by bigger brethren out of deals they might once have made, now had to seek riskier and more complicated ways to make money. Congress gave them i mode to do then in 2000, with the Commodity Futures Modernization Act, deregulating over-the-counter derivatives—securities that were essentially bets that two parties could privately make on the time to come price of an asset.

Like, for example, bundled mortgages.

stage was now set for investment banks to reap immense nigh-term profits by betting on the continuing rise of real-manor values—and likewise for such banks to neglect once the billions on their balanced sheets proved illusory because ultimately, overextended American borrowers— who had been sold more debt than they could afford, secured on ephemeral assets—began to default. In an always-speeding spiral, the bundled mortgage securities lost their AAA credit ratings, and banks vicious headlong into bankruptcy.

Former employees of financial behemothic Lehman Brothers 50eaving the New York City headquarters.

(Susan Watts/NY Daily News Archive/Getty Images

The Bush assistants, criticized for earlier bailouts, cut Lehman loose

In March 2008, the investment depository financial institution Carry Stearns began to go nether, so the U.Southward. treasury and the Federal Reserve system brokered, and partly financed, a deal for its acquisition past JPMorgan Chase. In September, the treasury announced it would rescue the government-supervised mortgage underwriters almost universally known every bit Fannie Mae and Freddie Mac.

President George W. Bush was a bourgeois Republican who, along with most of his appointees, believed in the virtue of deregulation. But with a crisis upon them, Bush-league and his lieutenants, particularly Treasury Secretary Paulson and Federal Reserve Chair Ben Bernanke, decided non to bet on leaving the markets unfettered. Although non required by law to bail out Bear, Fannie or Freddie, they did so to avoid disaster—only to exist castigated by fellow Republican believers in deregulation. Senator Jim Bunning of Kentucky called the bailouts "a calamity for our free-market system" and, essentially, "socialism"—albeit the sort of socialism that favored Wall Street, rather than workers.

Earlier in the year, Paulson had identified Lehman as a potential problem and spoke privately to its primary executive, Richard Fuld. Months passed as Fuld failed to find a buyer for his business firm. Exasperated with Fuld and stung by criticism from his fellow Republicans, Paulson told Treasury staff to comment—anonymously but on the tape—that the authorities would not rescue Lehman.

By the weekend of September 13-xiv, 2008, Lehman was clearly finished, with perhaps tens of billions of dollars in overvalued avails on its balance sheets. Anyone who still held Lehman securities on the assumption that the authorities would bond them out had bet wrong.

1 such institution was the Reserve Direction Corporation, which in September re-valued its Lehman securities at zippo and and then had to announce it could no longer afford to redeem shares in its money-market fund at par value. Shares in RMC's coin-marketplace fund were at present worth less than a dollar apiece—in the language of finance, RMC had "broken the buck," something no coin-market fund had washed to individual investors before. The money marketplace, some $3.5 trillion in size, provided vital short-term financing to U.S. corporations—but at present it joined banks, mortgage lenders, and insurance firms among the faithless giants of the financial organization that had suddenly proven spectacularly unworthy of conviction.

A series of bankruptcies and mergers followed as skittish investors, seeking safe harbor, pulled their coin out of supposedly high-return vehicles. Their preferred shelter: the U.South. treasury, into whose bonds and bills the terrified financiers of the world poured what liquid wealth they had left. Later on decades of trying to push the U.Southward. government out of banking, information technology turned out that in the end, the U.S. government was the only institution the bankers trusted. Starved of capital and credit, the economy faltered, and a long slump began.

Eric Rauchway is the author of several books on US history includingWinter War andThe Money Makers. He teaches at the Academy of California, Davis, and you can discover him on Twitter @rauchway.

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Source: https://www.history.com/news/2008-financial-crisis-causes

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