Changes

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.  The negative effects by October began spreading to all other sectors of the economy, and forecasts for the next year show little likely of a quick recovery anywhere.  

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.  The negative effects by October began spreading to all other sectors of the economy, and forecasts for the next year show little likely of a quick recovery anywhere.  

The crisis originated in the [[United States of America|United States]] and Western Europe, and has impacted every country in the world. Banks and financial companies have reported losses of over one trillion [[dollar]]s; investors have suffered [[paper loss|"paper losses"]] of many trillions.<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 50%, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 30%-50% 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 $8.4 trillion dollars in 2008, dropping to $12 trillion in October from $20 trillion in January 2008.

The crisis originated in the [[United States of America|United States]] and Western Europe, and has impacted every country in the world. Banks and financial companies have reported losses of over one trillion [[dollar]]s; 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 trying to arrange emergency bailouts for medium-sized countries, like Pakistan.  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 $150 a barrel in the summer, plunged in half. That 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" 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 trying to arrange emergency bailouts for medium-sized countries, like Pakistan.  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 $150 a barrel in the summer, plunged in half. That eased the gasoline crisis, helped commuters, and helped the airline industry.

In ''The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities'', [[Howard Husock]] describes how the [[Community Reinvestment Act]] of 1977 and the expansion in 1995 contributed to the Financial Crisis of 2008. <ref>[http://www.city-journal.org/html/10_1_the_trillion_dollar.html The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities], Howard Husock, ''City Journal'', Winter 2000</ref>  

In ''The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities'', [[Howard Husock]] describes how the [[Community Reinvestment Act]] of 1977 and the expansion in 1995 contributed to the Financial Crisis of 2008. <ref>[http://www.city-journal.org/html/10_1_the_trillion_dollar.html The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities], Howard Husock, ''City Journal'', Winter 2000</ref>  

As hundreds of billions of dollars poured into the U.S. from abroad, 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, especially to people with mediocre [[credit]] who would not previously have been eligible for mortgages and to speculators. Speculators were ordinary people who already had a house and who were hoping to make a large profit on the purchase and quick resale of another house or condominium.<ref> The only money the speculators had at risk was a down payment; sometimes the constuction company paid for the down payment and so the risk to the speculator was zero.</ref>  The expectation was that continuously rising house prices would cover the mortgage payments through refinancing. Many of the mortgages involved very low down payments and low monthly payments for the first year or two, after which the payments would start soaring. Sometimes the monthly payment at first was zero.  

As hundreds of billions of dollars poured into the U.S. from abroad, 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, especially to people with mediocre [[credit]] who would not previously have been eligible for mortgages and to speculators. Speculators were ordinary people who already had a house and who were hoping to make a large profit on the purchase and quick resale of another house or condominium.<ref> The only money the speculators had at risk was a down payment; sometimes the constuction company paid for the down payment and so the risk to the speculator was zero.</ref>  The expectation was that continuously rising house prices would cover the mortgage payments through refinancing. Many of the mortgages involved very low down payments and low monthly payments for the first year or two, after which the payments would start soaring. Sometimes the monthly payment at first was zero.  

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 declines in value, they would not be able to repay those loans.  To minimize the risk, companies sold insurance called "credit default swaps" ('''CDS''') to guarantee payment of the CDOs. The largest seller was [[American International Group]] ('''AIG'''), the world's largest insurance company. The CDOs and CDS 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 declines in value, they would not be able to repay those loans.  To minimize the risk, companies sold insurance called "credit default swaps" ('''CDS''') to guarantee payment of the CDOs. The largest seller was [[American International Group]] ('''AIG'''), the world's largest insurance company. The CDOs and CDS were especially attractive because they were not regulated by the government; experts are not sure how many trillions of dollars are involved.

"We're in the midst of a serious financial crisis," [[George W. Bush|President Bush]] warned the nation on Sept. 25, 2008.:

"We're in the midst of a serious financial crisis," [[George W. Bush|President Bush]] warned the nation on Sept. 25, 2008.:

{{QuoteBox|Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money....without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold: More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.<ref>see [http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html Bush speech online]</ref>}}

{{QuoteBox|Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money....without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold: More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.<ref>see [http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html Bush speech online]</ref>}}

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 key was for the Treasury to purchase $700 billion of the CDOs. The assumption was that the underlying mortgages were mostly perfectly good in the long run, but that a short-run panic had destroyed the market for them and frozen the financial system.  The bailout was needed, Bush said, to avert a major disaster for the economy.  [[Democratic Party|Democrats]] signed on to the bailout plan, adding provisions for [[Congress]]ional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House [[Republican Party|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 bailout was needed, Bush said, to avert a major disaster for the economy.  [[Democratic Party|Democrats]] signed on to the bailout plan, adding provisions for [[Congress]]ional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House [[Republican Party|Republicans]] said no, and GOP presidential nominee [[John McCain]] held off endorsement.   

[[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 lost a trillion dollars in value in one day as uncertainty reigned.  Finally a large majority passed an expanded bailout 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, designed to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill. As the Treasury starts operation of the actual bailout, no one is sure how it will operate or whether it will succeed.

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 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, designed to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill. As the Treasury starts operation of the actual bailout, no one is sure how it will operate or whether it will succeed. The Treasury has dropped plans to buy toxic securities and instead has used $250 billion to prop up major banks.  It has refused to allow the money to be used to help the [[automobile]] industry. 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 markey jumped 6% points 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 October Paulson and Bernanke have used their new powers to take an ownership stake in the nine largest U.S. banks, of about $25 billion each. These banks are now partly owned and controlled by the government.

In October Paulson and Bernanke have used their new powers to take an ownership stake in the nine largest U.S. banks, of about $25 billion each. These banks are now partly owned and controlled by the government.