2008 News of the Nation - Financial Crisis Hits Hard

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Financial Crisis Hits Hard

The U.S. economy began to unravel during the summer of 2007, when home prices began to drop and the rates on subprime mortgages started to increase, leading to foreclosures and defaults. Most of the banks that held these mortgages had sold them to investment banks, which in turn bundled the mortgages into securities and sold them to investors, including pension funds, hedge funds, and foreign national banks. The drop in home prices and the attendant increase in foreclosures caused a sharp fall in the value of the securities, leaving banks and investors with enormous losses and a diminished market for their assets.

Investment banks began to crumble. In March, the Federal Reserve approved a $30 billion loan to JPMorgan Chase to take over Bear Stearns. The crisis grew more dire over the summer, and in September, the U.S. government placed Fannie Mae and Freddie Mac—companies that together held more than half of the country's mortgages—under government conservatorship. Over the course of just days, the once venerable Lehman Brothers filed for bankruptcy, Bank of America acquired Merrill Lynch, and the Fed agreed to a $85 billion rescue of insurance giant American International Group. In addition, JP Morgan Chase bought the majority of Washington Mutual almost immediately after the government seized the company. The Dow Jones Industrial Average plunged by hundreds of points during this tumultuous period.

Bush Administration Embarks on a Series of Bailouts

President Bush signed a $700 billion bailout package in early October. The legislation gave the Treasury Department unprecedented authority to buy a wide range of troubled financial assets, gave the government an equity stake in companies that participate in the plan, and extended $150 billion in tax breaks to individuals and companies. The day after Bush signed the bailout bill, the stock markets in America, Europe, and Asia experienced their steepest one-day decline in two decades. About one month after the bailout was passed, the Treasury Department shifted course and said it would help banks lend to consumers rather than buying troubled mortgage assets.

All the while, grim economic news continued to be reported by the government: the GDP experienced its first decline in 17 years, the unemployment rate continued to rise (by December, it had reached 6.7%), the National Bureau of Economic Research announced that the U.S. has been in recession since Dec. 2007, and U.S. manufacturing hit a 26-year low. By December, nearly 2 million people had lost jobs in 2008. In addition, the three major U.S. automakers—GM, Ford, and Chrysler—pleaded unsuccessfully to Congress for a industry-wide bailout package.

Looking Beyond 2008

Obama, who will inherit this mess in January, vowed that once in office he would quickly enact a vast recovery plan, which would include a public works program, to shore up the economy and employ the growing number of jobless. In addition to covering traditional infrastructure projects, such as improving roads, utilities, dams, and schools, Obama said the public works program would address 21st-century needs, such as expanding broadband Internet access, updating government buildings to make them more energy efficient, improving information technology at medical institutions, and upgrading computers in schools.

"We will create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s," Obama said.

For more information on the U.S. economy:

• Unemployment Rate in the U.S.
• Biggest One-Day Declines in the Dow
• Largest Bankruptcies in the U.S.