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The '''Financial Crisis of 2008''' is an ongoing financial crisis centered in the [[United States of America|United States]] and Western Europe, with reverberations around 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 '''Financial Crisis of 2008''' is an ongoing worldwide financial crisis that is the worst the world has seen since 1932. It 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.

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.

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.

Although an American presidential election is in its last month, candidates have not focused on the crisis. Both major parties blame the other for neglecting adequate regulation. Both the major party candidates have expressed anger at the crisis, and have promised extensive new regulations of the financial industry.

Although an American presidential election is in its last month, candidates have not focused on the crisis. Both major parties blame the other for neglecting adequate regulation. Both the major party candidates have expressed anger at the crisis, and have promised extensive new regulations of the financial industry.

==Causes==

==Causes==

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>  

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

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

==Bubble bursts==

==Bubble bursts==

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.

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]], only one major bank failed (New York's Bank of United States, in late 1930), although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>  

On 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]], only one major bank failed (New York's Bank of United States, in late 1930), 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.  However Wachovia then broke its deal and merged into Wells Fargo. The result is that four major banks now dominate the American economy (Bank of America, Citibank, JP Morgan Chase, and Wells Fargo), along with dozens of regional chains and thousands of small local banks.

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 broke its deal and merged into Wells Fargo. The result is that four major banks now dominate the American economy (Bank of America, Citibank, JP Morgan Chase, and Wells Fargo), along with dozens of regional chains and thousands of small local banks.