Beginning of the Stock Market Crash and Housing/Banking Crisis of 2008
The beginning of the Stock Market Crash and Housing/Banking Crisis of 2008 marked a significant economic downturn in the United States, rooted in the unsustainable growth of the housing market from 2006 onward. During this period, home values had risen dramatically, but by the end of 2009, they would plummet by thirty percent, leading to widespread foreclosures and a considerable drop in the stock market. Contributing factors included historically low mortgage rates and policies aimed at increasing minority home ownership, which resulted in a surge of subprime lending and alternative mortgage products. As adjustable-rate mortgages reset, many homeowners found themselves unable to refinance, resulting in defaults as housing prices fell.
Financial instability became evident in early 2007, with significant losses reported by major banks linked to subprime mortgages. The crisis intensified in 2008, culminating in the bankruptcy of Lehman Brothers and the sale of Bear Stearns and Merrill Lynch, leading to a loss of confidence in the banking system. In response, the U.S. government enacted the Emergency Economic Stabilization Act, which included a $700 billion bailout to stabilize the financial sector. Despite these efforts, the stock market experienced its largest percentage drop, signaling the onset of the Great Recession, which brought about high unemployment and a substantial decrease in personal wealth for many Americans. This crisis had a lasting impact on the economy and financial regulations in the years that followed.
Beginning of the Stock Market Crash and Housing/Banking Crisis of 2008
Beginning of the Stock Market Crash and Housing/Banking Crisis of 2008
At the beginning of 2006, the US housing market was operating at a fever pitch, with home values skyrocketing and expected to continue to rise into the foreseeable future. From 1997 to 2006, the value of a home increased 127 percent. But by the end of 2009, housing prices would fall by thirty percent overall, the stock market would fall fifty-seven percent, and that millions would end up in foreclosure.
Following the terrorist attacks of 9/11 and the resulting economic crisis, the Federal Reserve reduced the federal funds rate from 6.25 to 1.75 percent and then to one percent in 2003, a record low. Mortgage rates fell, and it became increasingly easy to fund the purchase of a home to follow the American dream. President George W. Bush's NeighborWorks America program encouraged minority home ownership, with the goal of five and a half million more minority-owned homes by 2010. The Financial Services Modernization Act of 1999 allowed banks, insurance companies, and securities firms to operate together, causing conflicts of interest for their investments. Subprime mortgages backed by the government's Fannie Mae and Freddie Mac became common and were wrapped up with investments made by big US financial companies. The market was flooded with alternative mortgage products (AMPs) that loosened lending standards to the point that borrowers held very little, if any, equity. Home prices soared, making homeowners feel more secure about taking home equity loans or investing in more properties. Adjustable rate mortgages (ARMs) had such low initial rates that they far surpassed the draw of a traditional thirty-year loan.
In mid-2006, the unsustainable US housing market began to decline, breaking a tradition of decades of steady price increases. As ARMs reset, homeowners were unable to refinance if they owed more on their home than it was worth in the declining market, so they had to pay higher rates or default on their loans. Interest rates also rose, making it harder to finance the purchase of a home, and the foreclosure rate grew. From September 2008 to September 2012, there were four million foreclosures in the United States.
Financial markets began to show problems in February 2007, when Hong Kong and Shanghai Banking Corporation (HSBC) reported a loss of $10.5 billion from subprime loans. More than one hundred mortgage companies closed in 2007. The financial companies that had invested in subprime loans, including some of the largest investment banks in the United States, experienced large financial losses. Bear Stearns was sold to JP Morgan Chase in March 2008, Merrill Lynch was sold to Bank of America in September 2008, and Lehman Brothers went bankrupt in the same month. Morgan Stanley and Goldman Sachs became commercial banks. Insurance companies American International Group (AIG), Ambac, and MBIA also had losses from credit default swaps related to subprime lending. Fannie Mae and Freddie Mac, previously government-sponsored entities, were taken over by the federal government.
The Federal Reserve, led by Chairman Ben Bernanke, stepped in to stabilize the economy by helping JP Morgan Chase with its purchase of Bear Stearns and guaranteed bank deposits up to a certain amount. Americans feared a run on the banks. The Emergency Economic Stabilization Act of 2008, including the Troubled Asset Relief Program (TARP), was enacted on October 3, 2008, providing a $700 billion bailout for the US banking system. Citigroup received $45 billion, Bank of America $45 billion, AIG $40 billion, JP Morgan Chase $25 billion, and Wells Fargo $25 billion. Automobile manufacturers General Motors and Chrysler also received funds from TARP. Even so, the stock market crashed with the largest percentage drop ever seen in the United States during the first week of October. The Federal Reserve cut the federal funds rate to zero to one-quarter percent, where it remained in 2014. The Great Recession had begun, with an unemployment rate of ten percent by 2009. US citizens had lost one-quarter of their personal wealth and were wary of investing with what money they had left after the crisis.