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The '''Financial Crisis of 2008''', continuing into 2009, is an ongoing worldwide financial crisis that is the worst the world has seen since 1933 with the [[Great Depression]]. Drastic measures to confront seemingly insurmountable financial calamity resulted in the creation of '''TARP''' (Troubled Assets Relief Program), $700 billion safety net by the U.S. Government.  The National Bureau of Economic Research<ref>NBER is a private organization that follows its own standards as set by eminent economists such as [[Milton Friedman]]; its dating of business cycles is widely accepted by conservatives.</ref> has identified the peak of the last expansion in December 2007; the U.S. economy has been in decline ever since.<ref>See "Text of the NBER's statement on the recession and FAQ's" [http://www.usatoday.com/money/economy/2008-12-01-recession-nber-statement_N.htm ''USA Today'' Dec 1, 2008]. "The U.S. economy entered a recession in December 2007, a committee of economists at the private National Bureau of Economic Research said," at [http://www.marketwatch.com/news/story/US-recession-began-December-2007/story.aspx?guid={7DCF90E4-D61A-4014-83CE-45E938CD632C} Rex Nutting] - MarketWatch</ref>  [[Image:CRASH08.JPG|thumb|330px|Oct 11, 2008 editorial; cartoon by Horsey stresses the global collapse]]  The crisis has caused the [[Recession of 2008]], which reached bottom in summer 2009, causing a worldwide economic decline that is the most severe since the 1930s. Proponents of [[free market]] capitalism declare that  [[Federal Reserve]] Chairman [[Ben Bernanke]] should not have bailed out failing firms and instead should have allowed free market capitalism to quickly recover as it did in the depression of 1920 without government intervention (free market capitalists assert that government intervention merely drags out recessions and depressions).<ref>http://www.youtube.com/watch?v=zzTXaAXusiI</ref><ref>http://www.youtube.com/watch?v=czcUmnsprQI</ref>  A 2005 study found that government corporate bailouts are often done for mere political considerations and the economic resources allocated exhibit significantly worse economic performance than resources allocated using purely business considerations.<ref>http://papers.ssrn.com/sol3/papers.cfm?abstract_id=676905</ref>

The '''Financial Crisis of 2008''' is an ongoing global financial crisis that is the worst the world has seen since 1933 with the [[Great Depression]]. Drastic measures to confront seemingly insurmountable financial calamity resulted in the creation of '''TARP''' (Troubled Assets Relief Program), $700 billion safety net [[appropriation|appropriated]] by the U.S. Congress.  The National Bureau of Economic Research<ref>NBER is a private organization that follows its own standards as set by eminent economists such as [[Milton Friedman]]; its dating of business cycles is widely accepted by conservatives.</ref> has identified the peak of the last boom cycle in December 2007; the U.S. economy has been in decline ever since.<ref>See "Text of the NBER's statement on the recession and FAQ's" [http://www.usatoday.com/money/economy/2008-12-01-recession-nber-statement_N.htm ''USA Today'' Dec 1, 2008]. "The U.S. economy entered a recession in December 2007, a committee of economists at the private National Bureau of Economic Research said," at [http://www.marketwatch.com/news/story/US-recession-began-December-2007/story.aspx?guid={7DCF90E4-D61A-4014-83CE-45E938CD632C} Rex Nutting] - MarketWatch</ref>  [[Image:CRASH08.JPG|thumb|330px|Oct 11, 2008 editorial; cartoon by Horsey stresses the global collapse]]  The crisis has caused the [[Recession of 2008]], which reached bottom in summer 2009, causing a worldwide economic decline that is the most severe since the 1930s. As of 2013, there are still 4 million fewer jobs in the U.S. than in 2008 - despite $5 trillion in federal [[stimulus]] spending.  

The [[International Monetary Fund]] (IMF) calculates that the global financial crisis will produce $3.4 trillion in losses for financial institutions around the world between 2007 and 2010.<ref> Peter Dattels and Laura Kodres, "Global Financial System Shows Signs of Recovery, IMF Says," [http://www.imf.org/external/pubs/ft/survey/so/2009/RES093009A.htm ''IMF Survey Magazine'' Sept. 30, 2009]</ref>

 

The [[International Monetary Fund]] (IMF) calculated that the global financial crisis would produce $3.4 trillion in losses for financial institutions around the world by 2010.<ref> Peter Dattels and Laura Kodres, "Global Financial System Shows Signs of Recovery, IMF Says," [http://www.imf.org/external/pubs/ft/survey/so/2009/RES093009A.htm ''IMF Survey Magazine'' Sept. 30, 2009]</ref> World [[GDP]] in 2007 was approximately $70 trillion, so the immediate decline in the economic output of the planet was about 5%.

==Overview==

==Overview==

Negative economic news has spread outward from financial institutions to depress housing, construction, office buildings, automobiles, retail sales, state and local government, and vitually every other sector of the economy. Consumer spending has plunged, and banks have been very reluctant to loan money. Major banks and corporations have gone bankrupt.  

Negative economic news spread outward from financial institutions connected to [[Fannie Mae]] and the real estate boom to depress housing sales, construction, commercial real estate, automobiles, retail sales, state and local government, and virtually every other sector of the economy. Consumer confidence and spending plunged. Major banks and corporations went bankrupt.  

The recession is worldwide.  In recent months governments across the world have spent huge sums of money to reverse the crisis, but thus far the results have been inconclusive and the declines continue. The U.S. government provided cash bailouts of several hundred billion dollars and long-term loan guarantees of over $7 trillion dollars (compared to a GDP of $15 trillion a year in the U.S.).  Conservatives have been as dismayed and baffled by the crisis as everyone else.  Rush Limbaugh, for example, blames Obama.

The recession was worldwide.  Initially governments across the world borrowed and spent huge sums of money to reverse the crisis, but the results were anaemic and the decline continued. By 2013, the notion of a [[Keynesian]] stimulus had been abandoned by the the [[European Union]], which cut it's budget in real terms, and the United States which invoked a [[sequestration]] of federal mandated spending to reduce the baseline for future years. While the prospect of deflation ordinarily would be real, the Federal Reserve had vastly increased the [[money supply]] both domestically and abroad with lending to foreign [[Central bank]]s. Although the U.S. monetary base aggregates were four times larger than in mid 2007, federal spending was 50% more than in 2008, and  the accumulated [[national debt]] one-third greater, U.S. [[GDP]] output still lagged and the workforce was the size (134 million workers) as it was in 2003 - despite population having grown by 24 million people. The U.S. government provided cash bailouts of several hundred billion dollars and long-term loan guarantees of over $7 trillion dollars (compared to a GDP of $14.6 trillion in 2008).   

Unlike crises in the mid 1970s and early 1980s, this one began in the financial sector with devastating effects on many very large financial companies worldwide, especially in September 2008.  The negative effects by October 2008 began spreading to all other sectors of the economy, and forecasts for the next year show little likely of a quick recovery anywhere. For the effects on the broader economy (outside of finance and autos) see [[Recession of 2008]].

Unlike crises in the mid 1970s and early 1980s, the panic began in the financial and real estate sector with devastating effects on many very large financial companies worldwide, especially in September 2008.  The negative effects by October 2008 began spreading to all other sectors of the economy, and forecasts for the next several years showed little likelihood of recovery anywhere. For the effects on the broader economy (outside of finance and autos) see [[Recession of 2008]].

The crisis originated in the United States and Western Europe, and has impacted every country in the world. Banks and financial companies have reported losses of over one trillion dollars; investors have suffered [[paper loss|"paper losses"]] of many trillions. U.S. stocks are down 50% from their peak in 2007.<ref> For most people the loss is a "paper" loss because they still own the stock and it might go up, or down. If they bought stock in 2003 for $1000, watched it go to $1500 in 2008, then drop to $1000 again in 2008, their "paper loss" is $500 but their real loss is zero since they are back where they started. People who bought at $800 still have made a $200 paper profit. People who bought at $1200, say, have a paper loss of $200. The paper loss or gain becomes real when they finally sell the stock. See [[Paper loss]] for more details</ref> Paper losses for owners of stock in major financial institution have been over 70%, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 50-70% in major countries and [[pension]] funds have large paper losses.  Paper losses in real estate have been in the trillions; the average price of American houses fell 20%, with 30% and higher declines in California and Florida.  However, thus far ordinary depositors with cash in the bank have suffered no losses. Owners of stocks in the 5000 largest U.S. corporations have paper losses of $10 trillion dollars in 2008, dropping to $10 trillion in October from $20 trillion in late 2007.  

In late September the crisis focused on liquidity--financial companies owned hundreds of billions of dollars of "toxic" securities, mostly based on U.S. [[mortgage]]s; they could not sell the toxic securities because no one knew how much they were worth, and large scale loans between major institutions stopped flowing as the system lost liquidity and froze up. A $800 billion rescue plan became law in the U.S. October 3, but its impact will not be clear for a while. Meanwhile Europe's economic crisis continues to deteriorate, as trillions of dollars in losses accumulate there and in Russia, China and India and in many smaller countries.  International agencies such as the International Monetary Fund are arranging emergency bailouts for medium-sized countries, like Pakistan and Ukraine.  All around the world people are sending their money to the U.S. and Japan because the banks there are safer than their own banks.  The price of oil, which reached $145 a barrel in the summer, plunged to under $50. That plunge eased the gasoline crisis, helped commuters, and helped the airline industry.

In late September the crisis focused on liquidity--financial companies owned hundreds of billions of dollars of "toxic" real estate assets, mostly based on U.S. [[Fannie Mae]]-backed [[mortgage]]s; they could not sell the toxic securities because no one knew how much they were worth, and large scale loans between major institutions stopped flowing as the system lost liquidity and froze up. A $800 billion rescue plan became law in the U.S. October 3. Meanwhile Europe's sovereign debt crisis continued to deteriorate, as trillions of dollars in losses accumulated there and in many other countries.  International agencies such as the International Monetary Fund are giving guidance for medium-sized countries, like Pakistan and Ukraine.  In the panic, people around the world sent their money to the U.S. and Japan because the banks there are more tightly regulated and considered safer than their own banks.  The price of oil, which reached $145 a barrel in the summer, plunged to under $50. That plunge eased pump prices, helped commuters, and the airline industry.

[[Image:BRIDGE.JPG|thumb|400px|Tom Toles cartoon lampoons Federal bailout efforts as a badly designed [[bridge to nowhere]], Dec. 1, 2008]]

[[Image:BRIDGE.JPG|thumb|400px|Tom Toles cartoon lampoons Federal bailout efforts as a badly designed [[bridge to nowhere]], Dec. 1, 2008]]

Both parties have expressed anger at the crisis, and have promised extensive new regulations of the financial industry. However the Republicans have blocked additional bailout aid to General Motors, which is on the verge of bankruptcy.<ref> Treasury Secretary Paulson told Congress on Nov. 18 that the Bush administration remains "firmly opposed" to using any of the $700 billion financial bailout fund to help rescue Detroit's Big Three, "no matter how badly they need the help." [http://www.foxnews.com/politics/2008/11/18/paulson-rejects-bailout-money-automakers-senate-considers-legislation/ Fox news report] </ref> Democratic Congressional leaders and President-elect [[Barack Obama]] have pushed for a [[bailout]] of the auto industry and are expected to move it forward in January, 2009.

Both parties have expressed anger at the crisis, and have promised extensive new regulations of the financial industry. The Republicans opposed additional bailout aid to General Motors, which was on the verge of bankruptcy.<ref> Treasury Secretary Paulson told Congress on Nov. 18 that the Bush administration remains "firmly opposed" to using any of the $700 billion financial bailout fund to keep afloat auto manufacturers, "no matter how badly they need the help." [http://www.foxnews.com/politics/2008/11/18/paulson-rejects-bailout-money-automakers-senate-considers-legislation/ Fox news report] </ref> Democratic Congressional leaders and President [[Barack Obama]] had the [[United States Treasury]] take control of General Motors while paying existing shareholders 22 cents on the dollar for their investment and claims, and not demanding any meaningful concessions from the [[labor union]]s to bring wages more in line with a competitive world standard.

The Bush administration undertook a program in which it took control of several of the largest financial institutions (Fannie Mae, Freddie Mac, and AIG insurance), forced the mergers of others, purchased $125 billion of ownership in the 9 largest banks in the U.S., and provided relief to the largest bank, Citigroup.

The Bush administration undertook a program in which it took control of several of the largest financial institutions and [[government sponsored entities]] ([[Fannie Mae]], [[Freddie Mac]], and AIG insurance) at the heart of the crisis, forced mergers of others, purchased $125 billion of ownership in the 9 largest banks in the U.S., and provided relief to the largest bank, Citigroup.

Until October the crisis had little impact on the non-financial sectors of the world economy, but then negative impacts started appearing.  Companies could not borrow money for expansion or in some cases for routine operations, and had to cut back. Consumer spending fell and unemployment started to rise sharply.  By November pessimistic reports were coming in daily from practically every sector of the  American economy. There were no bright spots, and with tax revenues down, state governments began large-scale cutbacks, especially in New York and California.

Until October the crisis had little impact on the non-financial sectors of the world economy, but then negative impacts started appearing.  Companies could not borrow money for expansion or in some cases for routine operations, and had to cut back. Consumer spending fell and unemployment rose sharply.  By [[2008 Presidential election|Election day in November]] pessimistic reports were coming in daily from practically every sector of the  American economy. There were no bright spots, and with tax revenues down, state governments began large-scale cutbacks, especially in New York and California.

By late October it appeared the financial crisis was slowing down the economies of all countries of the world, leading perhaps to a serious recession with widespread unemployment and loss of business. The major countries have been taking aggressive steps to dissolve the liquidity freeze and get money flowing again, and to stimulate economies that are headed downward.

By late October it appeared the financial crisis was causing a slowdown of all the economies of the world, and a serious recession with widespread unemployment and business failures The Federal Reserve took aggressive steps to dissolve the liquidity freeze and to allow lending to flow again.

==Causes==

==Causes==

The [[NYTimes]] says Senator [[Charles Schumer]] D-NY, is the most responsible for Wall Street's collapse. <ref>[http://www.nytimes.com/2008/12/14/business/14schumer.html A Champion of Wall Street Reaps Benefits] NYTimes, December 13, 2008</ref> Schumer as a member of the Banking and Finance Committees, led efforts to regulate credit-rating agencies, shield financial institutions from government oversight and tougher regulations, and saved key industry players billions of dollars in taxes and fees.

The [[NYTimes]] says Senator [[Charles Schumer]] D-NY, is the most responsible for Wall Street's collapse. <ref>[http://www.nytimes.com/2008/12/14/business/14schumer.html A Champion of Wall Street Reaps Benefits] NYTimes, December 13, 2008</ref> Schumer as a member of the Banking and Finance Committees, led efforts to regulate credit-rating agencies, shield financial institutions from government oversight and tougher regulations, and saved key industry players billions of dollars in taxes and fees.

===Selling mortgage packages to big investors===

===Selling Fannie Mae-backed mortgage bundles to pension funds and institutional investors===

Americans owed some $10 trillion on their mortgages, most of which were sound with payments made on time. However financiers bundled the mortgages into very complicated packages called "'''collateralized debt obligations''''<ref> That is, homeowners were obligated to pay the debts and the collateral behind them was the physical house.</ref> or CDOs. Hundreds of billions of dollars worth of CDO's were sold to banks, pension funds and financiers in the U.S. and Europe. Generally they borrowed cash to buy the CDOs.  The risk was that if the CDO's declined in value, they would not be able to repay those loans.  The CDOs were especially attractive because they were not regulated by the government; experts are not sure how many trillions of dollars are involved.

Americans owed some $10 trillion on their mortgages, most of which were sound with payments made on time. However financiers bundled the mortgages into very complicated packages called "'''collateralized debt obligations''''<ref> That is, homeowners were obligated to pay the debts and the collateral behind them was the physical house.</ref> or CDOs. Hundreds of billions of dollars worth of CDO's were sold to banks, pension funds and financiers in the U.S. and Europe. Generally they borrowed cash to buy the CDOs.  The risk was that if the CDO's declined in value, they would not be able to repay those loans.  The CDOs were especially attractive because they were not regulated by the government; experts are not sure how many trillions of dollars are involved.

Many mortgages were held by mortgage companies like [[Countrywide]] and [[Washington Mutual]], as well as investment banks such as [[Bear Stearns]], [[Merrill Lynch]], [[Lehman Brothers]], [[Morgan Stanley]] and [[Goldman Sachs]], as well as commercial banking chains like [[Wachovia]] and [[Bank of America]], which have thousands of local offices.

Many mortgages were held or originated by mortgage companies like [[Countrywide]] and [[Washington Mutual]], as well as investment banks such as [[Bear Stearns]], [[Merrill Lynch]], [[Lehman Brothers]], [[Morgan Stanley]] and [[Goldman Sachs]], as well as commercial banking chains like [[Wachovia]] and [[Bank of America]], which have thousands of local offices.

 

===Commercial real estate===

===Commercial real estate===

The speculative [[housing bubble|real-estate bubble]] went far beyond residential homes, it infected as well all kinds of commercial real estate,<ref>Commercial real estate lending is more specialized than Fannie Mae lending, as much commercial property tend to be one-of-kind investments; finding comparable properties to establish appraisal value can be very difficult and complicated. Hence, commercial rates tend to begin at 10% for the best credit customers with much shorter terms and balloon payments.</ref> such as office buildings, shopping centers, apartment complexes, hotels, casinos and even empty lots. People bought high expecting to  sell higher, and were stunned when the market collapsed. People who loaned money to real estate firms were confident of a 20% return, but more likely lost 25%. The value of office buildings plunged 43% after the peak in Nov. 2007.  Most investors who bought in 2007 probably lost all their investment.

The speculative [[housing bubble|real-estate bubble]] went far beyond residential homes, it infected as well all kinds of commercial real estate,<ref>Commercial real estate lending is more specialized than Fannie Mae lending, as much commercial property tend to be one-of-kind investments; finding comparable properties to establish appraisal value can be very difficult and complicated. Hence, commercial rates tend to begin at 10% for the best credit customers with much shorter terms and balloon payments.</ref> such as office buildings, shopping centers, apartment complexes, hotels, casinos and even empty lots. People bought high expecting to  sell higher, and were stunned when the market collapsed. People who loaned money to real estate firms were confident of a 20% return, but more likely lost 25%. The value of office buildings plunged 43% after the peak in Nov. 2007.  Most investors who bought in 2007 probably lost all their investment.

[[Image:Geithner1.jpg|thumb|330px|Critics feared Geithner's vague plans would crash]]

[[Image:Geithner1.jpg|thumb|330px|Critics feared Geithner's vague plans would crash]]

The [[Obama Administration]], taking office on Jan. 20, 2009,  moved to handle the crisis on two fronts.  Working with Democrats in Congress (and three moderate Republican Senators), it passed the "[[American Recovery and Reinvestment Act of 2009]]", calling for $500 billion of new spending and nearly $300 billion in new tax cuts. The new law began operations in mid-February, 2009, and supporters hoped it would slow and turn around the nosediving economy.  Conservative critics feared it would be ineffective in the short run and add to the national debt and tax burdens in the long run. As of late March no results are visible.

The [[Obama Administration]], taking office on Jan. 20, 2009,  moved to handle the crisis on two fronts.  Working with Democrats in Congress (and three moderate Republican Senators), it passed the "[[American Recovery and Reinvestment Act of 2009]]", calling for $500 billion of [[Direct_spending#New_spending|new spending]] and nearly $300 billion in new tax cuts. The new law began operations in mid-February, 2009, and supporters hoped it would slow and turn around the nosediving economy.  Conservative critics feared it would be ineffective in the short run and add to the national debt and tax burdens in the long run. As of late March no results are visible.

With major banks on the verge of failure, Treasury Secretary [[Timothy Geithner]] unveiled yet another massive [[bailout]] program in mid-February. Trillions would be spent to move toxic assets out of the banks, but few details were provided. The widespread reaction was very negative, and Geithner lost more of his credibility as a problem solver.  Geither finally came back with a plan on March 23 that will not need additional funding or approval by Congress.  The Treasury will use $100 billion from the Troubled Asset Relief Program (TARP), as well as new capital from private investors, in order to generate $500 billion in purchasing power to buy toxic loans and assets. The program could potentially expand to $1 trillion over time.

With major banks on the verge of failure, Treasury Secretary [[Timothy Geithner]] unveiled yet another massive [[bailout]] program in mid-February. Trillions would be spent to move toxic assets out of the banks, but few details were provided. The widespread reaction was very negative, and Geithner lost more of his credibility as a problem solver.  Geither finally came back with a plan on March 23 that will not need additional funding or approval by Congress.  The Treasury will use $100 billion from the Troubled Asset Relief Program (TARP), as well as new capital from private investors, in order to generate $500 billion in purchasing power to buy toxic loans and assets. The program could potentially expand to $1 trillion over time.