Changes

The '''Financial Crisis of 2008''' was a 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 '''Financial Crisis of 2008''' was a 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" [https://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.   

Some [[free market]] advocates believe Congress and the [[Federal Reserve]] should not have bailed out failing firms and instead should have allowed market mechanism to operate.<ref>Free market advocates assert successful enterprises should be rewarded for doing things right, and failing businesses should be allowed to perish for making mistakes and not providing the public with the things they need or are in demand; government intervention can drag out recessions and depressions. [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  more for political considerations, and the economic resources allocated exhibit significantly worse  performance than resources allocated using practical considerations <ref>http://papers.ssrn.com/sol3/papers.cfm?abstract_id=676905</ref>

Some [[free market]] advocates believe Congress and the [[Federal Reserve]] should not have bailed out failing firms and instead should have allowed market mechanism to operate.<ref>Free market advocates assert successful enterprises should be rewarded for doing things right, and failing businesses should be allowed to perish for making mistakes and not providing the public with the things they need or are in demand; government intervention can drag out recessions and depressions. [https://www.youtube.com/watch?v=zzTXaAXusiI]</ref><ref>https://www.youtube.com/watch?v=czcUmnsprQI</ref>  A 2005 study found that government corporate bailouts are often done  more for political considerations, and the economic resources allocated exhibit significantly worse  performance than resources allocated using practical considerations <ref>http://papers.ssrn.com/sol3/papers.cfm?abstract_id=676905</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%.

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%.

"Option adjustable rate mortgages" (nicknamed "Pick-A-Pay") allowed borrowers to vary their monthly payments; they could be so so small they did not cover their interest charges. That meant the total principal grows over time, compared to normal mortgages where the debt owed shrinks over 30 years to zero and the borrower owns the house free and clear. By 2008 banks sold these dangerous "option adjustable rate" mortgages to two million customers.  They made sense if and only if the price of houses kept going up and the borrower could sell it in a year ot two at a huge profit. But if house prices declined, the borrower could stop paying and the bank was left with the loss.

"Option adjustable rate mortgages" (nicknamed "Pick-A-Pay") allowed borrowers to vary their monthly payments; they could be so so small they did not cover their interest charges. That meant the total principal grows over time, compared to normal mortgages where the debt owed shrinks over 30 years to zero and the borrower owns the house free and clear. By 2008 banks sold these dangerous "option adjustable rate" mortgages to two million customers.  They made sense if and only if the price of houses kept going up and the borrower could sell it in a year ot two at a huge profit. But if house prices declined, the borrower could stop paying and the bank was left with the loss.

Timeline video showing Democrats opposing regulating housing market financing. President Bush, Senator McCain and Alan Greenspan all predicting financial  collapse and offering regulation. [http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1 See video]

Timeline video showing Democrats opposing regulating housing market financing. President Bush, Senator McCain and Alan Greenspan all predicting financial  collapse and offering regulation. [https://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1 See video]

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>[https://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 Fannie Mae-backed mortgage bundles to pension funds and institutional investors===

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

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.

For example, in 2006 at the top of the market Tishman Speyer Properties and BlackRock Realty invested $5.4 billion to buy the largest apartment complex in the United States, in downtown New York City. Stuyvesant Town and Peter Cooper Village, with 110 buildings and 11,227 apartments housing median income families. The plan was to spend billions in upgrades, and as tenants moved out, to raise the rents.  The expectation proved wildly overoptimistic, and the monthly rents collected did not cover the debt payments. In January 2010 Tishman Speyer and BlackRock turned over the property to creditors, taking a 100% loss.<ref>Charles V. Bagli, "Huge Housing Complex in N.Y. Returned to Creditors," [http://www.nytimes.com/2010/01/25/nyregion/25stuy.html?hp ''New York Times'' Jan. 25, 2010]</ref>

For example, in 2006 at the top of the market Tishman Speyer Properties and BlackRock Realty invested $5.4 billion to buy the largest apartment complex in the United States, in downtown New York City. Stuyvesant Town and Peter Cooper Village, with 110 buildings and 11,227 apartments housing median income families. The plan was to spend billions in upgrades, and as tenants moved out, to raise the rents.  The expectation proved wildly overoptimistic, and the monthly rents collected did not cover the debt payments. In January 2010 Tishman Speyer and BlackRock turned over the property to creditors, taking a 100% loss.<ref>Charles V. Bagli, "Huge Housing Complex in N.Y. Returned to Creditors," [https://www.nytimes.com/2010/01/25/nyregion/25stuy.html?hp ''New York Times'' Jan. 25, 2010]</ref>

===Misuse of Credit Default Swaps===

===Misuse of Credit Default Swaps===

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.  

Merrill Lynch was sold to Bank of America for $50 billion, about half its value a few months before. Investors realized that AIG could no longer honor the insurance policies it wrote. It lost $13 billion in the first half of 2008 and its shares fell 95% in value. AIG was "too big" to be allowed to fail, so it was given an $85 billion loan from the government; in return the government received 80% of its stock. The government had to add another $38 billion to the AIG rescue in October.<ref>Barry Meier and Mary Williams Walsh, "A.I.G. to get Additional $37.8 Billion," [http://www.nytimes.com/2008/10/09/business/economy/09insure.html?_r=1&ref=business&oref=slogin ''New York Times,'' Oct. 8, 2008]</ref>  In effect AIG, along with GSE (government-sponsored enterprises) Fanny Mae and Freddy Mac were nationalized.  The Federal Reserve, with $800 billion in assets, was assisted by the Treasury, which gave it more funds.<ref>See [http://www.nytimes.com/2008/10/02/business/02crisis.html?_r=1&hp=&adxnnl=1&oref=slogin&pagewanted=all&adxnnlx=1222952525-cWL0bOgQjxNvxNo+OH1qAw Joe Nocera, "36 Hours of Alarm and Action as Crisis Spiraled," ''New York Times'' (Oct. 1, 2008)]</ref>  

Merrill Lynch was sold to Bank of America for $50 billion, about half its value a few months before. Investors realized that AIG could no longer honor the insurance policies it wrote. It lost $13 billion in the first half of 2008 and its shares fell 95% in value. AIG was "too big" to be allowed to fail, so it was given an $85 billion loan from the government; in return the government received 80% of its stock. The government had to add another $38 billion to the AIG rescue in October.<ref>Barry Meier and Mary Williams Walsh, "A.I.G. to get Additional $37.8 Billion," [https://www.nytimes.com/2008/10/09/business/economy/09insure.html?_r=1&ref=business&oref=slogin ''New York Times,'' Oct. 8, 2008]</ref>  In effect AIG, along with GSE (government-sponsored enterprises) Fanny Mae and Freddy Mac were nationalized.  The Federal Reserve, with $800 billion in assets, was assisted by the Treasury, which gave it more funds.<ref>See [https://www.nytimes.com/2008/10/02/business/02crisis.html?_r=1&hp=&adxnnl=1&oref=slogin&pagewanted=all&adxnnlx=1222952525-cWL0bOgQjxNvxNo+OH1qAw Joe Nocera, "36 Hours of Alarm and Action as Crisis Spiraled," ''New York Times'' (Oct. 1, 2008)]</ref>  

===European crises===

===European crises===

The European Central Bank aggressively lent money to banks trying to ensure that banks would have adequate cash. The moves have not reassured savers or investors, and European stock markets have fallen even further than the American stock markets, as have the stock markets in China and Russia.   

The European Central Bank aggressively lent money to banks trying to ensure that banks would have adequate cash. The moves have not reassured savers or investors, and European stock markets have fallen even further than the American stock markets, as have the stock markets in China and Russia.   

On October 13, France, Germany, Spain, the Netherlands and Austria committed €1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in banks, in an emergency effort to head off the collapse of their financial systems.<ref>Carter Dougherty, Nelson Schwartz and Floyd Norris, "Financial Crises Spread in Europe," [http://www.nytimes.com/2008/10/06/business/06markets.html?_r=1&hp&oref=slogin ''New York Times,'' Oct 6, 2008]; Gregory Viscusi, [http://www.bloomberg.com/apps/news?pid=20601087&sid=azerJ573HcbI&refer=home "EU Nations Commit 1.3 Trillion Euros to Bank Bailouts," ''Bloomberg.com'' Oct. 13. 2008]</ref>

On October 13, France, Germany, Spain, the Netherlands and Austria committed €1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in banks, in an emergency effort to head off the collapse of their financial systems.<ref>Carter Dougherty, Nelson Schwartz and Floyd Norris, "Financial Crises Spread in Europe," [https://www.nytimes.com/2008/10/06/business/06markets.html?_r=1&hp&oref=slogin ''New York Times,'' Oct 6, 2008]; Gregory Viscusi, [https://www.bloomberg.com/apps/news?pid=20601087&sid=azerJ573HcbI&refer=home "EU Nations Commit 1.3 Trillion Euros to Bank Bailouts," ''Bloomberg.com'' Oct. 13. 2008]</ref>

====Britain====

====Britain====

Britain on October 8 announced a gigantic £400 billion ($680 billion) rescue plan for its banks; the government would partially own them.  Prime Minister [[Gordon Brown]] said banks would still be run by their old managers, but that the government would have to be "satisfied" on matters of salaries, [[dividend]]s and lending activities.  The money involved is about a third of Britain's annual [[Gross Domestic Product|GDP]] (comparable to $5 trillion in the U.S. economy.)

Britain on October 8 announced a gigantic £400 billion ($680 billion) rescue plan for its banks; the government would partially own them.  Prime Minister [[Gordon Brown]] said banks would still be run by their old managers, but that the government would have to be "satisfied" on matters of salaries, [[dividend]]s and lending activities.  The money involved is about a third of Britain's annual [[Gross Domestic Product|GDP]] (comparable to $5 trillion in the U.S. economy.)

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 [https://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.  

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"  [https://www.nytimes.com/2008/10/25/business/25hedge.html?ref=business ''New York Times,'' Oct 24, 2008]</ref>

In late November the government announced an $800 billion plan to boost consumer credit and the market for mortgage-related securities. Plans call for the Federal Reserve in early 2009 to extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by highly rated consumer and small business loans.<ref>"Non-recourse" loans means that if they are not paid back the borrowers cannot be sued for their other assets. Mortgages fall in this category, so that if people default they just walk away from the debt and never have to repay it. However it damages their credit rating.</ref> Treasury will contribute $20 billion in funds through its Troubled Asset Relief Program (TARP). The Federal Reserve also announced it will purchase up to $100 billion in GSE (government-sponsored enterprises, especially Fannie Mae and Freddy Mac) debt through a series of competitive auctions starting in December, 2008. The Federal Reserve starting in December will purchase up to $500 billion in mortgage-backed securities backed by GSEs such as Fannie Mae and Freddie Mac. Federal Reserve Chairman Ben Bernanke said the Fed is preparing to launch new liquidity programs to support the economy in addition to further slashing interests rates.  The total commitments by the government in relief and loan guarantees exceeded $7 trillion, but the economy nevertheless continued to slip downward.<ref>Maya Jackson Randall, "Paulson Says Treasury Actively Mulling New Rescue Programs," [http://online.wsj.com/article/SB122816189458369851.html?mod=rss_Politics_And_Policy ''Wall Street Journal'' Dec. 1, 2008]</ref>

In late November the government announced an $800 billion plan to boost consumer credit and the market for mortgage-related securities. Plans call for the Federal Reserve in early 2009 to extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by highly rated consumer and small business loans.<ref>"Non-recourse" loans means that if they are not paid back the borrowers cannot be sued for their other assets. Mortgages fall in this category, so that if people default they just walk away from the debt and never have to repay it. However it damages their credit rating.</ref> Treasury will contribute $20 billion in funds through its Troubled Asset Relief Program (TARP). The Federal Reserve also announced it will purchase up to $100 billion in GSE (government-sponsored enterprises, especially Fannie Mae and Freddy Mac) debt through a series of competitive auctions starting in December, 2008. The Federal Reserve starting in December will purchase up to $500 billion in mortgage-backed securities backed by GSEs such as Fannie Mae and Freddie Mac. Federal Reserve Chairman Ben Bernanke said the Fed is preparing to launch new liquidity programs to support the economy in addition to further slashing interests rates.  The total commitments by the government in relief and loan guarantees exceeded $7 trillion, but the economy nevertheless continued to slip downward.<ref>Maya Jackson Randall, "Paulson Says Treasury Actively Mulling New Rescue Programs," [http://online.wsj.com/article/SB122816189458369851.html?mod=rss_Politics_And_Policy ''Wall Street Journal'' Dec. 1, 2008]</ref>

===Deepening recession===

===Deepening recession===

By early December the entire economy was heading downward with no bright spots. The recession that began in Dec. 2007 intensified, as retail sales plunged. In November 2008 Americans, their confidence shaken, saved their money and sharply reduced their credit card purchases. Auto sales were down 37% in November (compared to Nov. 2007) to the lowest rate in 26 years. GM sales fell 41% Ford fell 31% and the foreign cars were down just as much, with Toyota down 34%, Nissan down 42% and Honda down 32%.<ref>Stephanie Rosenbloom, "In November, Shoppers Cut Spending Even More," [http://www.nytimes.com/2008/12/03/business/economy/03shop.html?ref=business ''New York Times'' Dec. 2, 2008]; Nick Bunkley, "Another Month of Miserable Auto Sales," [http://www.nytimes.com/2008/12/03/business/03sales.html?ref=business ''New York Times'' Dec. 2, 2008].</ref> Retailers rang up the lowest November sales in more than 30 years, as holiday shopping not only failed to lift the economy but showed that the crisis is further distressing everyday consumers. Thirty major companies—including Macy's, Sears, Abercrombie & Fitch and Target—posted sales declines; Wal-Mart, anchoring the bottom of the price chain, sawincreased sales.  Retail sales in November fell 2.7 percent compared with the same month last year.<ref>Ylan Q. Mui, "Retailers Report a Crisis in All Aisles: November Sales Slump as Shoppers Stow Credit Cards," [https://www.washingtonpost.com/wp-dyn/content/article/2008/12/04/AR2008120404347.html?hpid=topnews ''Washington Post'' Dec. 5, 2008]</ref>

By early December the entire economy was heading downward with no bright spots. The recession that began in Dec. 2007 intensified, as retail sales plunged. In November 2008 Americans, their confidence shaken, saved their money and sharply reduced their credit card purchases. Auto sales were down 37% in November (compared to Nov. 2007) to the lowest rate in 26 years. GM sales fell 41% Ford fell 31% and the foreign cars were down just as much, with Toyota down 34%, Nissan down 42% and Honda down 32%.<ref>Stephanie Rosenbloom, "In November, Shoppers Cut Spending Even More," [https://www.nytimes.com/2008/12/03/business/economy/03shop.html?ref=business ''New York Times'' Dec. 2, 2008]; Nick Bunkley, "Another Month of Miserable Auto Sales," [https://www.nytimes.com/2008/12/03/business/03sales.html?ref=business ''New York Times'' Dec. 2, 2008].</ref> Retailers rang up the lowest November sales in more than 30 years, as holiday shopping not only failed to lift the economy but showed that the crisis is further distressing everyday consumers. Thirty major companies—including Macy's, Sears, Abercrombie & Fitch and Target—posted sales declines; Wal-Mart, anchoring the bottom of the price chain, sawincreased sales.  Retail sales in November fell 2.7 percent compared with the same month last year.<ref>Ylan Q. Mui, "Retailers Report a Crisis in All Aisles: November Sales Slump as Shoppers Stow Credit Cards," [https://www.washingtonpost.com/wp-dyn/content/article/2008/12/04/AR2008120404347.html?hpid=topnews ''Washington Post'' Dec. 5, 2008]</ref>

[[Image:Jobloss.jpg|thumb|300px]]

[[Image:Jobloss.jpg|thumb|300px]]

===Bank of America renegotiates mortgages===

===Bank of America renegotiates mortgages===

In early October, Bank of America, the new owner of Countrywide, reached a settlement with 11 states that sued it over fraudulent practices. The state of Illinois accused Countrywide of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like a false promise of a "no closing costs loan." Countrywide gave special incentives to its brokers for selling impossible loans by paying higher commissions on them. In reviewing one Illinois mortgage broker’s sales, the Illinois complaint said the "vast majority of the loans had inflated income, almost all without the borrower’s knowledge."  Bank of America did not deny the charges and instead agreed to pay out $8.4 billion to 400,000 Countrywide customers. Countrywide will reduce principal balances for some people and cut interest rates for others. Rates for some people could decline to as low as 2.5% and remain at that level for five years.  Fannie Mae, Freddie Mac and IndyMac, now all owned by the federal government, have begun their own programs to modify mortgage terms for some hard-pressed borrowers.

In early October, Bank of America, the new owner of Countrywide, reached a settlement with 11 states that sued it over fraudulent practices. The state of Illinois accused Countrywide of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like a false promise of a "no closing costs loan." Countrywide gave special incentives to its brokers for selling impossible loans by paying higher commissions on them. In reviewing one Illinois mortgage broker’s sales, the Illinois complaint said the "vast majority of the loans had inflated income, almost all without the borrower’s knowledge."  Bank of America did not deny the charges and instead agreed to pay out $8.4 billion to 400,000 Countrywide customers. Countrywide will reduce principal balances for some people and cut interest rates for others. Rates for some people could decline to as low as 2.5% and remain at that level for five years.  Fannie Mae, Freddie Mac and IndyMac, now all owned by the federal government, have begun their own programs to modify mortgage terms for some hard-pressed borrowers.

<ref>Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [http://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

<ref>Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [https://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

===Largest bank rescued===

===Largest bank rescued===

Citigroup, the world's largest bank was tottering in late November despite its receipt of $25 billion in TARP funding. Its value on the stock market plunged to $21 billion, down from $244 billion two years ago.  Round after round of layoffs have ended 75,000 jobs in 2008 out of 375,000 employees a year ago.  Very heavy exposure to toxic mortgages is the main culprit.  The government stepped in with the largest relief effort yet, including $20 billion in new cash, and guarantees of toxic assets by the Treasury, FDIC and Federal Reserve.

Citigroup, the world's largest bank was tottering in late November despite its receipt of $25 billion in TARP funding. Its value on the stock market plunged to $21 billion, down from $244 billion two years ago.  Round after round of layoffs have ended 75,000 jobs in 2008 out of 375,000 employees a year ago.  Very heavy exposure to toxic mortgages is the main culprit.  The government stepped in with the largest relief effort yet, including $20 billion in new cash, and guarantees of toxic assets by the Treasury, FDIC and Federal Reserve.

At all times Citigroup used elaborate mathematical risk models that looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. The prevailing approach at Citigroup and the other big banks was to make money as fast as possible (generating annual bonuses of $10 to $30 million for senior executives), which assigning zero to the risk of a system-wide downturn. Such a downturn came with disastrous consequences for Citigroup and its rivals on Wall Street.  Even after Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.   

At all times Citigroup used elaborate mathematical risk models that looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. The prevailing approach at Citigroup and the other big banks was to make money as fast as possible (generating annual bonuses of $10 to $30 million for senior executives), which assigning zero to the risk of a system-wide downturn. Such a downturn came with disastrous consequences for Citigroup and its rivals on Wall Street.  Even after Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.   

Despite two federal efforts Citigroup is still wobbly. It holds $20 billion of mortgage-linked securities that have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans of dubious value. And it also faces a potential massive losses on auto, mortgage and credit card loans as the economy worsens.<ref>Eric Dash and Julie Creswell, "Citigroup Pays for a Rush to Risk," [http://www.nytimes.com/2008/11/23/business/23citi.html?ref=business&pagewanted=all ''New York'' Times,’’ Nov. 22, 2008]</ref>

Despite two federal efforts Citigroup is still wobbly. It holds $20 billion of mortgage-linked securities that have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans of dubious value. And it also faces a potential massive losses on auto, mortgage and credit card loans as the economy worsens.<ref>Eric Dash and Julie Creswell, "Citigroup Pays for a Rush to Risk," [https://www.nytimes.com/2008/11/23/business/23citi.html?ref=business&pagewanted=all ''New York'' Times,’’ Nov. 22, 2008]</ref>

By the end of 2009 most big banks were in much better shape and the Treasury expects to recover all but $42 billion of the $370 billion it lent to ailing companies, with the portion lent to banks actually showing a slight profit.  Meanwhile, over 120 small and medium banks have been shut as insolvent; in most cases the FDIC picks up the losses and another bank takes over the operations and branches.<ref>Jackie Calmes, [http://www.nytimes.com/2009/12/07/business/07tarp.html?_r=1&hp=&adxnnl=1&adxnnlx=1260187849-MV96Nnjzom3OwAchzjIqrg "U.S. Forecasts Smaller Loss From Bailout of Banks," ''New York Times'' Dec. 6, 2009]</ref>

By the end of 2009 most big banks were in much better shape and the Treasury expects to recover all but $42 billion of the $370 billion it lent to ailing companies, with the portion lent to banks actually showing a slight profit.  Meanwhile, over 120 small and medium banks have been shut as insolvent; in most cases the FDIC picks up the losses and another bank takes over the operations and branches.<ref>Jackie Calmes, [https://www.nytimes.com/2009/12/07/business/07tarp.html?_r=1&hp=&adxnnl=1&adxnnlx=1260187849-MV96Nnjzom3OwAchzjIqrg "U.S. Forecasts Smaller Loss From Bailout of Banks," ''New York Times'' Dec. 6, 2009]</ref>

==Auto stimulus==

==Auto stimulus==

In addition to the Big Three hundreds of large suppliers of parts are in financial crisis as well; most would go under if the Big Three go bankrupt.

In addition to the Big Three hundreds of large suppliers of parts are in financial crisis as well; most would go under if the Big Three go bankrupt.

Intense debate in December 2008 focused on allowing bankruptcy or injecting billions more of federal aid; it would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency.  The Democrats in Congress supported president Bush's proposal to use the fuel-efficiency loans to help with the immediate problem. It passed the House but Senate Republicans broke with Bush and it failed.  The opponents called for a bankruptcy that would allow GM to get out of its contracts to pay union members high wages, as well as generous pensions and medical benefits to retired workers.  Bush then acted unilaterally and decided to make TARP loans to  GM and Chrysler, on December 19. GM and Chrysler will get $13.4 billions in loans they can use to pay their suppliers.<ref>GM and Chrysler will receive $4 billion each when they sign the loan agreements with the Treasury. GM will have access to an addition $5.4 billion on Jan. 16 and another $4 billion on Feb. 17 provided that Congress has released the remaining $350 billion for the Treasury’s TARP rescue program.</ref> GM can receive another $4 billion in February, but by then the Obama administration will be in charge, and it is emphasizing the need for a long-range solution.<ref>David E. Sanger, David M. Herszenhorn and Bill Vlasic, “Bush Aids Detroit, but Hard Choices Wait for Obama,” [http://www.nytimes.com/2008/12/20/business/20auto.html?hp ''New York Times'' Dec. 19, 2008]</ref>  

Intense debate in December 2008 focused on allowing bankruptcy or injecting billions more of federal aid; it would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency.  The Democrats in Congress supported president Bush's proposal to use the fuel-efficiency loans to help with the immediate problem. It passed the House but Senate Republicans broke with Bush and it failed.  The opponents called for a bankruptcy that would allow GM to get out of its contracts to pay union members high wages, as well as generous pensions and medical benefits to retired workers.  Bush then acted unilaterally and decided to make TARP loans to  GM and Chrysler, on December 19. GM and Chrysler will get $13.4 billions in loans they can use to pay their suppliers.<ref>GM and Chrysler will receive $4 billion each when they sign the loan agreements with the Treasury. GM will have access to an addition $5.4 billion on Jan. 16 and another $4 billion on Feb. 17 provided that Congress has released the remaining $350 billion for the Treasury’s TARP rescue program.</ref> GM can receive another $4 billion in February, but by then the Obama administration will be in charge, and it is emphasizing the need for a long-range solution.<ref>David E. Sanger, David M. Herszenhorn and Bill Vlasic, “Bush Aids Detroit, but Hard Choices Wait for Obama,” [https://www.nytimes.com/2008/12/20/business/20auto.html?hp ''New York Times'' Dec. 19, 2008]</ref>  

===Bankruptcy scenario===

===Bankruptcy scenario===