Changes

Multiple crises started pulling down major financial players.  Countrywide, which originated 20% of all American mortgages in 2006, collapsed and was bought up by Bank of America.  Bear Stearns, a large investment bank, went under; the government arranged a sale to JPMorgan Chase; stock holders lost about 90% of their investment, and the confidence in other banks was undermined.

Multiple crises started pulling down major financial players.  Countrywide, which originated 20% of all American mortgages in 2006, collapsed and was bought up by Bank of America.  Bear Stearns, a large investment bank, went under; the government arranged a sale to JPMorgan Chase; stock holders lost about 90% of their investment, and the confidence in other banks was undermined.

On September 7, 2008, the government took control of the two largest mortgage holders, "Fannie Mae"<ref>Federal National Mortgage Association (FNMA)</ref> and "[[Freddie Mac]]".<ref>Federal Home Loan Mortgage Corporation (FHLMC)</ref> The two had lost $15 billion on the $5.4 trillion in mortgages they owned, and their notes were widely held in [[China]] and many other countries.  The fear was that if the Treasury did not act the world's confidence in the US financial system would collapse.  However the rest of the world was in trouble too.  The stock markets in China and [[Russia]] plunged 50%, and the [[United Kingdom|British]] Treasury had to take over its largest mortgage company, [[Northern Rock]].  Vast sums of money flowed into the US because it was safer there than anywhere else.

On September 7, 2008, the government took control of the two largest mortgage holders, "Fannie Mae"<ref>Federal National Mortgage Association (FNMA)</ref> and "[[Freddie Mac]]."<ref>Federal Home Loan Mortgage Corporation (FHLMC)</ref> The two had lost $15 billion on the $5.4 trillion in mortgages they owned, and their notes were widely held in [[China]] and many other countries.  The fear was that if the Treasury did not act the world's confidence in the US financial system would collapse.  However the rest of the world was in trouble too.  The stock markets in China and [[Russia]] plunged 50%, and the [[United Kingdom|British]] Treasury had to take over its largest mortgage company, [[Northern Rock]].  Vast sums of money flowed into the US because it was safer there than anywhere else.

[[Image:PANIC08.jpg|thumb|300px|Panic in Wall Street, Sept. 2008; the "bull" is the symbol of optimism on Wall Street and the "bear" is the symbol of pessimism.  Here the bull panics.]]

[[Image:PANIC08.jpg|thumb|300px|Panic in Wall Street, Sept. 2008; the "bull" is the symbol of optimism on Wall Street and the "bear" is the symbol of pessimism.  Here the bull panics.]]

By September the major banks were no longer lending money and most reported huge losses as they wrote down the value of the CDOs and other assets. Short sellers sold large amounts of stock in threatened companies, causing further panic and driving down share prices.<ref>The short sellers did not own the shares; the practice was stopped on Sept. 19, 2008, by the [[Securities and Exchange Commission]] because it destabilized markets.</ref> [[Lehman Brothers]], one of the oldest and largest banks in New York, went bankrupt on Sept. 15 with no one to rescue it.  The collapse of Lehman with its $639 billion in assets had a multiplier effect worldwide, severely weakening other big banks and sharply increasing the level of fear and distrust inside the system that caused bankers to sharply reduce their lending.  Many large firms and hedge funds had borrowed billions of dollars from lenders and had pledged assets they owned as collateral. When the value of their collateral plummeted, the lenders demanded more collateral to make up the difference, so the borrowers had to sell assets to raise emergency cash.  The price of the assets they sold was falling, and large additional sales further depressed prices, creating a downward spiral.  

By September the major banks were no longer lending money and most reported huge losses as they wrote down the value of the CDOs and other assets. Short sellers sold large amounts of stock in threatened companies, causing further panic and driving down share prices.<ref>The short sellers did not own the shares; the practice was stopped on Sept. 19, 2008, by the [[Securities and Exchange Commission]] because it destabilized markets.</ref> [[Lehman Brothers]], one of the oldest and largest banks in New York, went bankrupt on Sept. 15 with no one to rescue it.  The collapse of Lehman with its $639 billion in assets had a multiplier effect worldwide, severely weakening other big banks and sharply increasing the level of fear and distrust inside the system that caused bankers to sharply reduce their lending.  Many large firms and hedge funds had borrowed billions of dollars from lenders and had pledged assets they owned as collateral. When the value of their collateral plummeted, the lenders demanded more collateral to make up the difference, so the borrowers had to sell assets to raise emergency cash.  The price of the assets they sold was falling, and large additional sales further depressed prices, creating a downward spiral.  

On September 19, 2008, the Treasury and Federal Reserve proposed a major rescue plan—the largest government intervention in the economy since [[World War II]]. The plan was for the Treasury to purchase $700 billion of the CDOs. The buyout was needed, Bush said, to avert a major disaster for the economy.  Most (but not all) Democrats signed on to the plan, adding provisions for Congressional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House Republicans said no, and GOP presidential nominee [[John McCain]] held off endorsement.   

On September 19, 2008, the Treasury and Federal Reserve proposed a major rescue plan—the largest government intervention in the economy since [[World War II]]. The plan was for the Treasury to purchase $700 billion of the CDOs. The buyout was needed, Bush said, to avert a major disaster for the economy.  Most (but not all) Democrats signed on to the plan, adding provisions for Congressional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House Republicans said no, and GOP presidential nominee [[John McCain]] held off endorsement.   

Conservatives were split on what to do.  Many agreed with Bush that the program proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the it.  The [[American Bankers Association]] and the [[Mortgage Bankers Association]] are fighting against any amendment that would reduce mortgage obligations for people in bankruptcy, while directing all the government funds to the banking industry.The U.S. Chamber of Commerce, normally an outspoken advocate of big corporate interests, instead stressed the crisis's impact on small and midsize businesses. "We're looking at an economy that was slipping toward recession even before this crisis culminated in a market lockup last week," said Chamber economist Martin Regalia. The debate in Congress, he said, "is costing every American taxpayer money, directly."<ref>Elizabeth Williamson, "Big Business Wants Deal, Setbacks and All," [http://online.wsj.com/article/SB122238988380577457.html ''Wall Street Journal'' Sept. 26, 2008]</ref>  Democratic nominee Senator [[Barack Obama]] endorsed the plan, as amended by Congressional Democrats. On the other hand, ordinary taxpayers and "Main Street", that is businessmen who operated at the local level, were highly suspicious of [[Wall Street]]. McCain, blaming the crisis on "the corruption and manipulation of our home mortgage system", rejected the bailout as a favor for Wall Street and little help to Main Street. Advocates of the market economy insisted that the market should run its course, and opposed the government intervention.<ref>See comments from a range of economists at [http://www.nytimes.com/2008/09/26/business/26assess.html?ref=business Peter S. Goodman, "Credit Enters a Lockdown," ''New York Times'' Sept. 25, 2008]</ref>  The fiscally irresponsible TARP program increased the [[national debt]] by $300 million in 2009.<ref>http://www.cbpp.org/cms/index.cfm?fa=view&id=2894</ref>

Conservatives were split on what to do.  Many agreed with Bush that the program proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the it.  The [[American Bankers Association]] and the [[Mortgage Bankers Association]] are fighting against any amendment that would reduce mortgage obligations for people in bankruptcy, while directing all the government funds to the banking industry.The U.S. Chamber of Commerce, normally an outspoken advocate of big corporate interests, instead stressed the crisis's impact on small and midsize businesses. "We're looking at an economy that was slipping toward recession even before this crisis culminated in a market lockup last week," said Chamber economist Martin Regalia. The debate in Congress, he said, "is costing every American taxpayer money, directly."<ref>Elizabeth Williamson, "Big Business Wants Deal, Setbacks and All," [http://online.wsj.com/article/SB122238988380577457.html ''Wall Street Journal'' Sept. 26, 2008]</ref>  Democratic nominee Senator [[Barack Obama]] endorsed the plan, as amended by Congressional Democrats. On the other hand, ordinary taxpayers and "Main Street," that is businessmen who operated at the local level, were highly suspicious of [[Wall Street]]. McCain, blaming the crisis on "the corruption and manipulation of our home mortgage system," rejected the bailout as a favor for Wall Street and little help to Main Street. Advocates of the market economy insisted that the market should run its course, and opposed the government intervention.<ref>See comments from a range of economists at [http://www.nytimes.com/2008/09/26/business/26assess.html?ref=business Peter S. Goodman, "Credit Enters a Lockdown," ''New York Times'' Sept. 25, 2008]</ref>  The fiscally irresponsible TARP program increased the [[national debt]] by $300 million in 2009.<ref>http://www.cbpp.org/cms/index.cfm?fa=view&id=2894</ref>

A compromise was agreed to by leaders of both parties but the "Emergency Economic Stabilization Act of 2008" (EESA)  was voted down in the House on Sept. 29.  Democrats favored the Bush bill 60%-40%, but Republicans voted no by  65-35%. The stock market lost a trillion dollars in value in one day as uncertainty reigned.  Finally a large majority passed a more expensive bill, that added $100 billion in new subsidies to the original $700 billion, plus tax breaks and a rise in FDIC insurance to $250,000 from $100,000, intended to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill.  

A compromise was agreed to by leaders of both parties but the "Emergency Economic Stabilization Act of 2008" (EESA)  was voted down in the House on Sept. 29.  Democrats favored the Bush bill 60%-40%, but Republicans voted no by  65-35%. The stock market lost a trillion dollars in value in one day as uncertainty reigned.  Finally a large majority passed a more expensive bill, that added $100 billion in new subsidies to the original $700 billion, plus tax breaks and a rise in FDIC insurance to $250,000 from $100,000, intended to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill.  

The Treasury TARP program proved erratic and had to be radically modified several times. The Treasury dropped the original plan to buy toxic securities and instead has used $250 billion to prop up major banks. In October Paulson and Bernanke used their new powers to take an ownership stake in the nine largest U.S. banks, of $7 to $25 billion each. These banks are now partly owned and controlled by the government. However those banks are keeping the money and not lending it out. The price of bank stocks has fallen sharply since the relief program was passed. The world's largest bank, Citigroup, was on the verge of collapse in late November and received a second loan of $20 billion (in addition to $25 billion in October), and a federal guarantee to cover most of its toxic investments.

The Treasury TARP program proved erratic and had to be radically modified several times. The Treasury dropped the original plan to buy toxic securities and instead has used $250 billion to prop up major banks. In October Paulson and Bernanke used their new powers to take an ownership stake in the nine largest U.S. banks, of $7 to $25 billion each. These banks are now partly owned and controlled by the government. However those banks are keeping the money and not lending it out. The price of bank stocks has fallen sharply since the relief program was passed. The world's largest bank, Citigroup, was on the verge of collapse in late November and received a second loan of $20 billion (in addition to $25 billion in October), and a federal guarantee to cover most of its toxic investments.

In mid-December Bush announced that $17.4 billion of TARP funds would be given to the automobile industry in the form of bridge loans,<ref name=bushremarksautobailout>http://blogs.wsj.com/autoshow/2008/12/19/bushs-remarks-on-the-auto-rescue-plan/ Wall Street Journal, "Bush’s Remarks on the Auto Rescue Plan", December 19, 2008</ref> just enough to prevent the companies from going bankrupt for a few weeks.<ref>http://online.wsj.com/article/SB122969367595121563.html Wall Street Journal, "U.S. Throws Lifeline to Detroit", December 20, 2008</ref> Bush defended the move by saying "if we were to allow the [[free market]] to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers."<ref name=bushremarksautobailout />

In mid-December Bush announced that $17.4 billion of TARP funds would be given to the automobile industry in the form of bridge loans,<ref name=bushremarksautobailout>http://blogs.wsj.com/autoshow/2008/12/19/bushs-remarks-on-the-auto-rescue-plan/ Wall Street Journal, "Bush’s Remarks on the Auto Rescue Plan," December 19, 2008</ref> just enough to prevent the companies from going bankrupt for a few weeks.<ref>http://online.wsj.com/article/SB122969367595121563.html Wall Street Journal, "U.S. Throws Lifeline to Detroit," December 20, 2008</ref> Bush defended the move by saying "if we were to allow the [[free market]] to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers."<ref name=bushremarksautobailout />

By mid-November the market had lost confidence in Treasury Secretary Paulson, who indicated he was baffled and would let the incoming Obama administration handle the unspent $450 billion.  The stock market jumped 6% on the news that Obama had picked New York banker [[Timothy Geithner]] to replace Paulson.<ref>Theo Francis, "Obama to Nominate New York Fed Chief Timothy Geithner as Treasury Secretary," [http://www.businessweek.com/election/2008/blog/archives/2008/11/obama_to_nomina.html?chan=top+news_top+news+index+-+temp_top+story ''Business Week'' Nov. 21, 2008]</ref>  In late November the Federal Reserve announced it will buy up to $600 billion in mortgage-related assets from Fannie Mae and Freddie Mac, hoping to restart the housing and credit markets.  Under the new "Term Asset-Backed Securities Loan Facility", or '''TALF''', the Federal Reserve will loan up to $200 billion to financial companies that hold securities backed by consumer and small-business loans.  

By mid-November the market had lost confidence in Treasury Secretary Paulson, who indicated he was baffled and would let the incoming Obama administration handle the unspent $450 billion.  The stock market jumped 6% on the news that Obama had picked New York banker [[Timothy Geithner]] to replace Paulson.<ref>Theo Francis, "Obama to Nominate New York Fed Chief Timothy Geithner as Treasury Secretary," [http://www.businessweek.com/election/2008/blog/archives/2008/11/obama_to_nomina.html?chan=top+news_top+news+index+-+temp_top+story ''Business Week'' Nov. 21, 2008]</ref>  In late November the Federal Reserve announced it will buy up to $600 billion in mortgage-related assets from Fannie Mae and Freddie Mac, hoping to restart the housing and credit markets.  Under the new "Term Asset-Backed Securities Loan Facility," or '''TALF''', the Federal Reserve will loan up to $200 billion to financial companies that hold securities backed by consumer and small-business loans.  

Hedge funds are private investment companies with a combined $1.7 trillion in assets. They have lost $180 billion since July and some are near collapse. Investors are demanding their money back, and Wall Street in late October is bracing for a shake-out in the industry.<ref>Louise Story, "Citadel Chief denies rumors of trouble"  [http://www.nytimes.com/2008/10/25/business/25hedge.html?ref=business ''New York Times,'' Oct 24, 2008]</ref>

Hedge funds are private investment companies with a combined $1.7 trillion in assets. They have lost $180 billion since July and some are near collapse. Investors are demanding their money back, and Wall Street in late October is bracing for a shake-out in the industry.<ref>Louise Story, "Citadel Chief denies rumors of trouble"  [http://www.nytimes.com/2008/10/25/business/25hedge.html?ref=business ''New York Times,'' Oct 24, 2008]</ref>

[[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 [[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.

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.