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The '''Financial Crisis of 2008''' is an ongoing financial crisis centered in the United States, with reverberations in Europe and around the world. Losses thus far have run to hundreds of billions of [[dollar]]s. Owners of stock in major financial institution have lost over 50% of their money, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 20%-50% in major countries and [[pension]] funds have lost value. The price of American houses fell 20%, with much larger declines in California and Florida.  However, thus far ordinary depositors with cash in the bank have suffered no losses.  

The '''Financial Crisis of 2008''' is an ongoing financial crisis centered in the United States, with reverberations in Europe and around the world. Losses thus far have run to hundreds of billions of [[dollar]]s. Owners of stock in major financial institution have lost over 50% of their money, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 20%-50% in major countries and [[pension]] funds have lost value. The price of American houses fell 20%, with much larger declines in California and Florida.  However, thus far ordinary depositors with cash in the bank have suffered no losses.  

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 $700 billion rescue plan was under intense debate in the U.S.

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.

==Causes==

==Causes==

In the early 2000s, U.S. interest rates were low and demand for housing was high, as housing prices soared, especially in [[California]], [[Florida]], [[Nevada]] and [[Arizona]]. Mortgage companies and banks were very eager to lend at low rates, especially to people with mediocre [[credit]] who would not previously have been eligible for mortgages.  The expectation was that rising house prices would cover the mortgage payments through refinancing. In addition, hundreds of billions of dollars poured into the U.S. from abroad, and financiers looked for imaginative ways to make a profit. They turned to [[real estate]].

In the early 2000s, U.S. interest rates were low and demand for housing was high, as housing prices soared, especially in [[California]], [[Florida]], [[Nevada]] and [[Arizona]]. Mortgage companies and banks were very eager to lend at low rates, especially to people with mediocre [[credit]] who would not previously have been eligible for mortgages.  The expectation was that rising house prices would cover the mortgage payments through refinancing. In addition, hundreds of billions of dollars poured into the U.S. from abroad, and financiers looked for imaginative ways to make a profit. They turned to [[real estate]].

HBOS (Halifax Bank of Scotland) had severe losses and in September was taken over by a bigger bank, the Lloyds TSB Group.   

HBOS (Halifax Bank of Scotland) had severe losses and in September was taken over by a bigger bank, the Lloyds TSB Group.   

In late September, the Fortis bank, the world's 20th largest business, was partially nationalized by three governments who injected $16 billion in emergency funds. The [[Belgium|Belgian]], [[Netherlands|Dutch]] and [[Luxembourg]] governments will each inject capital to buy 49% of the Fortis banking subsidiaries in their countries, giving the three governments a combined stake of 30-40%  in the entire bank.  In [[Germany]] Hypo Real Estate was given €35 billion ($50 billion) of credit guarantees by the government and other banks.  The government of [[Iceland]] took over Glitnir, the island’s third largest bank, by injecting €600 million ($862 million) of equity

In late September, the Fortis bank, the world's 20th largest business, was partially nationalized by three governments who injected $16 billion in emergency funds. The [[Belgium|Belgian]], [[Netherlands|Dutch]] and [[Luxembourg]] governments will each inject capital to buy 49% of the Fortis banking subsidiaries in their countries, giving the three governments a combined stake of 30-40%  in the entire bank.  In [[Germany]] Hypo Real Estate was given €35 billion ($50 billion) of credit guarantees by the government and other banks.  The government of [[Iceland]] took over Glitnir, the island’s third largest bank, by injecting €600 million ($862 million) of equity, as the entire island economy seemed shaky because it depended so much on large foreign loans.

 

===$700 billion bailout proposed===

===$700 billion bailout proposed===

[[Conservative]]s were split on what to do.  Many agreed with Bush that the bailout proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the bailout.  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. Believers in the market economy insisted that the market should run its course, and opposed the bailout.<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>

[[Conservative]]s were split on what to do.  Many agreed with Bush that the bailout proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the bailout.  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. Believers in the market economy insisted that the market should run its course, and opposed the bailout.<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>

A compromise bailout 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 immediately plunged 7% as uncertainty reigned.

A compromise bailout 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 an expanded bailout bill, that includes the $700 million to buy toxic securities, plus tax breaks and a rise in FDIC insurance to $250,000 from $100,000, designed to reassure ordinary depositors. As the Treasury starts operation of the actual bailout, no one is sure how it will operate or whether it will succeed.

==Collapse of #6 and #4 largest banks==

==Collapse of #6 and #4 largest banks==

O)n Sept. 25, Washington Mutual, the 6th largest bank in the US with $310 billion in assets, went [[bankrupt]] after a run in which depositors withdrew $17 billion in a few days. Its stockholders lost all their money, the US government took it over (through the [[FDIC]], which insures ordinary bank deposits), and resold it the same day to the biggest New York bank, JPMorgan Chase. It was the largest commercial bank failure in American history, by far.<ref>In the [[Great Depression]], no major banks failed in any major cities, although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>  

O)n Sept. 25, Washington Mutual, the 6th largest bank in the US with $310 billion in assets, went [[bankrupt]] after a run in which depositors withdrew $17 billion in a few days. Its stockholders lost all their money, the US government took it over (through the [[FDIC]], which insures ordinary bank deposits), and resold it the same day to the biggest New York bank, JPMorgan Chase. It was the largest commercial bank failure in American history, by far.<ref>In the [[Great Depression]], no major banks failed in any major cities, although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>  

Meanwhile the #4 U.S. bank, Wachovia, burdened by $120 billion in toxic securities,<ref> At the height of the bubble in 2006 Wachovia purchased  Golden West Financial, a California lender specializing in so-called pay-option mortgages that enabled people to buy houses for a much higher price than they could afford, hoping that rising house prices would allow them to refinance later.</ref> was bought out by Citigroup on Sept. 29 in a deal engineered by the FDIC.  The upshot was concentration of  Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup.

Meanwhile the #4 U.S. bank, Wachovia, burdened by $120 billion in toxic securities,<ref> At the height of the bubble in 2006 Wachovia purchased  Golden West Financial, a California lender specializing in so-called pay-option mortgages that enabled people to buy houses for a much higher price than they could afford, hoping that rising house prices would allow them to refinance later.</ref> was bought out by Citigroup on Sept. 29 in a deal engineered by the FDIC.  However Wachovia then announced a merger into Wells Fargo, and the matter is in court.

 

==See also==

==See also==

[[Henry M. Paulson]]

[[Henry M. Paulson]]