Downturn!…Whiplash!…Bust Up!…Evictions!….Bankruptcy!….Homes Abandoned!…. ”Crisis“ dominated the headlines in 2008. Many economists consider the financial crisis of 2008 to be the worst since the Great Depression. There was a reckoning with lax financial regulation and institutional greed; all of which resulted, ironically, in a mass government bailout of the very institutions that contributed to the near-collapse of the entire global financial system.
It is normal for the economy to fluctuate, but this was not a usual economic downturn. Adjustable rate mortgages did what they were meant to do: they ballooned, and the poorly qualified homeowners couldn’t keep up with the payments. As homeowners desperately flooded the real estate market with their toxic assets, they found a flat market with no buyers.
It was March 2008, and week by week we witnessed the unfolding of notable and historical financial firms, many of which were vanishing overnight. By October, depositors across the globe were panicked, showing up at their local banks like Washington Mutual and even as far afield as the Royal Bank of Scotland, frantically attempting to pull out their funds.
The Macs, Freddie and Fannie, needed bailing out, and the legendary Bear Stearns and Lehman Brothers would be gone. What had happened was that, unbeknownst to all (except for the institutions involved), a game of simple financial Three Card Monte was being played; a game in which corporations were buying large portfolios of real estate investments, many of them containing subprime debt, repackaging them, and selling them again to unsuspecting institutions and investors.
Predatory lenders seeded this demise. Often unwittingly, many homebuyers were qualified for loans that they could not afford. When the banks came knocking to collect on these ‘promise’-ary notes, we saw a systemic bankruptcy of a scale never seen before.
When the Feds swooped in to save the day, there was a sense of impunity: financial institutions got away with one of the biggest financial frauds in recent history. Like a trust fund kid who gets bailed out too many times, the big firms were indeed too big to fail. To prevent a collapse of the entire global financial system, the Federal Reserve bailed out the financial giant AIG, who had done these backroom credit swaps. The price of this bailout was an astronomical $85 billion, which was the largest stop gap measure ever initiated to evade a global financial apocalypse. The bailouts didn’t stop there; by September of 2008, there was a proposal for a $700 billion bailout package. After the first house vote on the bailout proposal, the Stock Market crashed in reaction.
Meanwhile, as the bailouts were being negotiated, retirees who had banked with many of the failed institutions were now faced with the prospect of going back to work to make up for their large portfolio losses. There was talk about Social Security being defunded. Huge chunks of personal assets were now gone. Young families with newly purchased homes, and real estate investors were all left underwater.
As expected, the not-so-delicate choreography between a crashed stock market and the swift bailout package may have proved to be a devil’s bargain. The question remains, have we learned from this history or are we doomed to repeat it?