Good day to each of you reading this column on the Great Depression and its affects on the American people.

What would 2008 usher in and how would the Federal Government and Federal Reserve react to the foreclosures? Would the housing market return and would the stock market become a “bear” market?

The housing bubble of 2007 has just burst in 2008 – Why? The subprime mortgage crisis and greed.

I must agree what I said in the last lesson that includes the following from the with the following insight– Mortgage-backed securities allowed non-bank financial institutions to enter the mortgage business. Before MBSs, only banks had large enough deposits to make long-term loans. They had the deep pockets to wait until these loans were repaid 15 or 30 years later. The invention of MBSs meant that lenders got their cash back right away from investors on the secondary market. The number of lenders increased. Some offered mortgages that didn’t look at a borrower’s job or assets.7 This created more competition for traditional banks. They had to lower their standards to compete.

Worst of all, MBSs were not regulated. The federal government regulated banks to make sure their depositors were protected, but those rules didn’t apply to MBSs and mortgage brokers. Bank depositors were safe, but MBS investors were not protected at all. Ouch!

Listen to what said that began before 2008 – The ‘subprime mortgage crisis’ was brought about by banks and financial institutions issuing high-risk candidates mortgages they couldn’t afforded. Subprime mortgages are typically mortgages granted to people with low credit scores (often in the low or below 600s), which are high risk for the lender.

During the mid-2000s, the housing market was booming – one of the main reasons was that banks were giving mortgages to high-risk candidates in order to fill up risky securities and bonds that they sold to investors in a pretty package, calling them AAA-rated (low-risk) securities (which simply was inaccurate). Additionally, securities called private-label mortgage-backed securities (PMBS) funded most of the subprime mortgages.

However, the housing bubble couldn’t last forever – and soon home owners couldn’t pay their mortgages. Because refinancing or selling homes at the astronomically high prices wasn’t a viable option for paying off their mortgages, mortgage loss rates started skyrocketing for investors and lenders alike.

And, in April of 2007, one of the leading subprime mortgage lenders New Century Financial Corp. filed for bankruptcy – and the bubble began to burst.

More subprime lenders began closing due to how the mortgage-backed securities were becoming rated as higher-risk. Without those options, housing demand began to take a dive, and prices fell drastically. And, within a short time, government-backed Fannie Mae and Freddie Mac suffered enormous losses due to their outstanding loans allocated for mortgage-backed securities (which they sold to investors as prime bundles). The federal government took them over in 2008, and the number of home foreclosures and repossessions increased drastically.

The bust of the housing market, brought on by the subprime mortgage crisis, majorly impacted the Great Recession, as it decreased construction, consumer spending, financial institutions’ operations, and investment and securities markets, according to reports.

So, the subprime mortgage crisis both collapsed the housing market, and created mistrust between banks (not wanting to lend to each other), which majorly impacted the 2007 banking crisis and the Great Recession overall.

Folks, this is a speeding train that wasn’t about to stop! The housing bubble burst, home owners went into foreclosure, leading subprime lenders filed for bankruptcy, Fannie Mae & Freddie Mac suffered very large losses and had to be rescued by the Federal Government, new construction tanked, consumer spending was shaken and consumer credit was nearly frozen by the banks along with banks holding the foreclosed mortgages.

Like a rolling stone gathering no moss, the stock market of 2007 was a rear-view mirror distance away from 2008 for the stock market was on its way to crash in September 2008 by losing more than half its value.

To put this into perspective, look at an Acorns article from 2019. The double whammy of the falling housing market and stock market meant that Americans suffered staggering losses. Between 2007 and 2011, one-quarter of American families lost at least 75 percent of their wealth, and more than half of all families lost at least 25 percent of their wealth.

These are staggering numbers that affected most Americans, their families, their households and their livelihood for then and for the rest of their lives. Such a bitter pill to swallow!

Here is an important nugget—If you were to compare the 1929 Great Depression to the 2008 Great Recession, one could look no further than see the following similarities which include loose credit rules, greed, careless speculation and taking chances, and having too much debt.

Let’s provide a timeline for 2008 in US History – This timeline is provided from:

This original source article written by Kimberly Amadeo and reviewed by Michael J Boyle containing links to their sources can be found at by clicking here.

2007: The Fed Didn’t Do Enough to Prevent the Recession

On April 17, 2007, the Federal Reserve announced that the federal financial regulatory agencies that oversee lenders would encourage them to work with lenders to work out loan arrangements rather than foreclose. Alternatives to foreclosure included converting the loan to a fixed-rate mortgage and receiving credit counseling through the Center for Foreclosure Solutions. Banks that worked with borrowers in low-income areas could also receive Community Reinvestment Act benefits.

In September, the Fed began lowering interest rates. By the end of the year, the Fed funds rate was 4.25%. But the Fed didn’t drop rates far enough, or fast enough, to calm markets.

July 2008: The Recession Began

The subprime crisis reached the entire economy by the third quarter of 2008 when GDP fell by 0.3%.

But for early observers, the first clue was in October 2006. Orders for durable goods were lower than they had been in 2005, foreshadowing a decline in housing production. Those orders also measure the health of manufacturing orders, a key indicator in the direction of national GDP.

August 2008: Fannie and Freddie Spiraled Downward

Mortgage giants Fannie Mae and Freddie Mac were fully succumbing to the subprime crisis in the summer of 2008. The failure of the government-backed companies that insured mortgages signaled that the bottom was dropping out. The Bush administration announced plans to take over Freddie and Fannie in order to prevent a full collapse.

Many in Congress then blamed Fannie and Freddie for causing the crisis. They said the two semi-private companies took too many risks in their drive for profits. But, in reality, the companies were trying to remain competitive in an industry that had already become too risky.

September 2008: The Stock Market Crashed

On September 29, 2008, the stock market crashed. The Dow Jones Industrial Average fell 777.68 points in intra-day trading. Until 2018, it was the largest point drop in history. It plummeted because Congress rejected the bank bailout bill.10

Although a stock market crash can cause a recession, in this case, it had already begun. But the crash of 2008 made a bad situation much, much worse.

October 2008: $700 Billion Bank Bailout Bill

On October 3, 2008, Congress established the Troubled Assets Relief Program, which allowed the U.S. Treasury to bail out troubled banks. The Treasury Secretary lent $115 billion to banks by purchasing preferred stock.11

It also increased the Federal Deposit Insurance Corporation limit for bank deposits to $250,000 per account and allowed the FDIC to tap federal funds as needed through 2009. That allayed any fears that the agency itself might go bankrupt.

As you look at the timeline, look at the comparison to the 1929 depression and the fact that the Federal Reserve did little if anything to stop this potential recession.

This is a pipe dream for the thought of converting the rate from an adjustable or low payment rate to a fixed rate—If the person could not pay the adjustable rate, how could that person pay the fixed rate? If you are drowning in debt, the answer is foreclosure and to declare bankruptcy.

The Federal Reserve announced or “passed the buck” to federal financial regulatory agencies that oversee lenders and “encourage” them to work with lenders to work out loan arrangements. Did that work? Evidently not, as the number of foreclosures increased monthly and the housing industry dried up.

Markets began to panic in 2008 as the Federal Reserve began to lower interest rates, but, would the outcome be too late? As the summer of 2008 was ending, we see that various key indicators were raising their ugly heads including unemployment numbers rising, home foreclosures rising, the sickly health of manufacturing orders effected by the decline of housing production and the GDP or Gross Domestic Product falling by 0.3%.

Please be reminded that this was on the heels of the collapse of Bear Stearns on March 14,2008. If it weren’t for the Federal Reserve and Chase Bank to join together, thus providing a loan to Chase to pass it on to Bear with the condition that the amount was limited to Bear’s collateral and Chase could default on the loan if Bear did not have enough assets to pay it off.

As Paul Harvey says, here’s the rest of the story for on March 16, Chase announced to the world that they had bought Bear for 236 million dollars. What a deal for Chase had purchased the stock on March 15 for around $2.00 per share which was a far cry from a year ago when Bear’s stock went for $170.00 per share. Oh how the mighty were falling.
Incidentally, the loan payment from Chase to the Federal Reserve was paid 3 days later on March 17. Back on March 16, the Federal Reserve approve a 30 Billion Dollar Loan to Chase for Bear’s assets. Why? Using their insight, the Federal Reserve would then hold and sell Bear’s assets at a higher price when the market improved which would be in years to come.

As summer came to an end and fall of 2008 came about another major landmine exploded as Fannie Mae and Freddie Mac were collapsing. Fears arose and it was time for the Federal Government to step forward. The Federal Housing Finance Agency or FHFA was formed on July 30 thus allowing $300 billion in FHA loan guarantees, $15 billion in housing tax breaks, and $3.9 billion in housing grants.

Yes, the federal government stepped in to strengthen the collapsing Fannie Mae and Freddie Mac until they were ready to stand back on their own two feet. As for the bailout, we, the tax payers were on the hook for 18 billion dollars. But, all ended well on September 7 as Fannie Mae and Freddie Mac were under the government’s wing as they began paying back their costs and another 58 Billion dollars in profit to the general fund so they stand alone.

We saw August 2008 close and the Federal Government bailing out Fannie Mae and Freddie Mac, but the waters of trouble were brewing as September would bring more turmoil in the form of the Lehman Brothers bankruptcy, AIG bailout, economic woes for every American, the 700-billion-dollar bailout, Washington Mutual goes bankrupt, and the stock market crashed to end a 14-day span of economic devastation.

Fourteen days of uncertainty, lives lost, financial uncertainty, nations’ economies affected negatively, frozen credit markets, foreign stock exchanges falling and gold soaring to over $900.00 per ounce.

It amazes me that we did not enter into another depression for the economy was going south and the taxpayer was left holding the bag. Many if not most families lost their 401K’s, life savings, houses, and a healthy living to being placed into poverty while the giants in the banking industry kept getting bigger and bigger and reaping the benefits of bailing out bankrupt companies.

The first thought that comes to mind is greed and that is placed on the Federal Government, the Federal Reserve, the Big Banks and the securities companies who wanted to cut corners and get rich quick. Analyze the bailouts and look who gained from these bailouts and bankruptcies. What is it you, the average taxpayer?

Why did Lehman Brothers, an investment bank, declare bankruptcy? High risk real estate and sub-prime mortgages that went south in 2006.Being the fourth largest investment bank, Lehman brothers was required to raise billions of dollars in those two markets to keep the doors open.

As one goes deeper, Lehman Brothers had four causes of bankruptcy, according to

  1. Risk. The bank had taken on too much risk without a corresponding ability to raise cash quickly. In 2008, it had $639 billion in assets, technically more than enough to cover its $613 billion in debt. However, the assets were difficult to sell. As a result, Lehman Brothers couldn’t sell them to raise sufficient funds. That cash flow problem is what led to its bankruptcy.
  2. Culture. Management rewarded excessive risk-taking. Lehman’s chief risk officer said that top management ignored many of her risk-management strategies. Top managers wanted to stay ahead of competitors that also used high-risk strategies, and they also thought the company was too smart to fail.
  3. Overconfidence. The firm relied on complicated financial products based on quick real estate growth just as the real estate market began to decline. Between 2000-2006, its revenue grew 130% thanks to early successes with mortgage-backed securities. In 2003-2004, Lehman Brothers bought five mortgage lenders, which allowed it to originate and underwrite subprime loans, increasing its profitability. In March 2006, Lehman bought heavily into commercial real estate and risky loans and instead of selling them right away, it kept them on its books. Management thought it would make more money owning these assets but its timing couldn’t have been worse, as real estate prices were falling.
  4. Regulator Inaction. The Securities and Exchange Commission and other regulators didn’t take action. As early as 2007, the SEC knew Lehman Brothers was taking on too much risk, but the agency never required Lehman to do anything about it. It also didn’t publicly disclose to rating agencies that the bank had exceeded risk limits.

Now, for every cause, their must be an effect and here is the effect:

Lehman’s bankruptcy sent financial markets reeling. The Dow Jones Industrial Average fell 504.48 points, its worst decline in seven years.8 Losses continued until March 5, 2009, when the Dow closed at 6,594.44. That was a 53% drop from its peak of 14,164.53 on October 10, 2007. Investors fled to the relative safety of U.S. Treasury bonds, sending prices up.

Investors knew that Lehman’s bankruptcy threatened the financial institutions that owned its bonds. On Sept. 16, 2008, the Reserve Primary money market fund “broke the buck.” That meant its shares, normally worth at least $1, were only worth $0.97. Investors lost confidence in the money market fund when it announced losses of $785 million in Lehman’s commercial paper.

On Sept. 17, 2008, the collapse spread. Investors withdrew a record $196 billion from their money market accounts. If the run had continued, businesses wouldn’t have been able to get money to fund their day-to-day operations. In just a few weeks, the economy would have collapsed. For example, shippers wouldn’t have had the cash to deliver food to grocery stores.

The economic collapse was very close, in fact, to close for comfort and the clock was ticking if Congress did not approve the 700-billion- dollar bailout. The final straw came when AIG had to be bailed out by the Federal Reserve for a mere 85-billion dollars and why? The AIG or American International group was using unregulated credit default swaps to increase profits. What is a credit default swap? Let’s turn to this article.

A credit default swap (CDS) is a financial derivative that guarantees against bond risk. It allows one lender to “swap” its risk with another.

Swaps work like insurance policies. They allow purchasers to buy protection against an unlikely but devastating event. Like an insurance policy, the buyer makes periodic payments to the seller.

Most of these swaps protect against the default of high-risk municipal bonds, sovereign debt, and corporate debt. Investors also use them to protect against the credit risk of mortgage-backed securities, junk bonds, and collateralized debt obligations.

How Credit Default Swaps Work

Here’s an example to illustrate how swaps work. Say a company issues a bond. Several companies purchase the bond, thereby lending the company money. They want to make sure they don’t get burned if the borrower defaults, so they buy a credit default swap from a third party.

That third party agrees to pay the outstanding amount of the bond if the lender defaults. Most often, the third party is an insurance company, bank, hedge fund, central counterparty, or reporting dealer. The swap seller collects premiums for providing the swap, usually on a quarterly basis.

How Swaps Caused the 2008 Financial Crisis

By mid-2007, there was more than $45 trillion invested in swaps. That was more than the money invested in the U.S. stocks, mortgages, and U.S. Treasuries combined. The U.S. stock market held $22 trillion. Mortgages were worth $7.1 trillion, and U.S. Treasuries were worth $4.4 trillion.

Lehman Brothers found itself at the center of this crisis. The firm owed $600 billion in debt. Of that, $400 billion was “covered” by credit default swaps. Some of the companies that sold the swaps were American International Group (AIG), Pacific Investment Management Company, and the Citadel hedge fund.

These companies didn’t expect all the debt to come due at once. When Lehman declared bankruptcy, AIG didn’t have enough cash on hand to cover swap contracts. The Federal Reserve had to bail it out.

Even worse, banks used swaps to insure complicated financial products. They traded swaps in unregulated markets where buyers had no relationships to the underlying assets. They didn’t understand their risks. When they defaulted, swap sellers such as MBIA, Ambac, and Swiss Re were hit hard.

Overnight, the CDS market fell apart. No one bought them because they realized the insurance wasn’t able to cover large or widespread defaults. They accumulated capital and made fewer loans. That cut off funding for small businesses and mortgages. These were both large factors that kept unemployment at record levels.

This leads us to September 17, 2008 or the day that the United States economy nearly collapsed. The losses mounted, the bankruptcies mounted, the 700-billion-dollar bailout had not been passed and investors were fled from the stock market in droves.

According to this article from the investors withdrew a record $144.5 billion from the money market accounts. By Sept. 19, when the U.S. Treasury took action, they had taken out $172 billion.

Worried investors were moving the funds to U.S. Treasurys. That forced Treasury yields to drop below zero. In other words, investors were so panicked that they no longer cared if they got any return on their investment. They just didn’t want to lose capital.

As the economy teetered on collapse, it was time for Secretary Paulson to confer with Federal Reserve Chairman Ben Bernanke. He agreed that the problem was beyond the scope of monetary policy. The federal government was the only entity large enough to take effective action. The two decided to ask Congress to appropriate $700 billion to bail out banks in danger of bankruptcy. Why such a large sum? It had to be enough to stop the panic and restore confidence.

On September 20, Secretary Paulson went before Congress and asked Congress to approve the 700-billion-dollar bailout so the Treasury could buy up mortgage-backed securities in danger of defaulting. As of that date, Congress did not pass the bailout.

Great News, we are of the woods or so we thought and then came another bankruptcy six days later which was the Washington Mutual Bank going into bankruptcy.

As for the result of this bankruptcy, Washington Mutual was sold to J.P. Morgan for 1.9 billion dollars. What a bargain, considering depositors withdrew 16.7 billion dollars just 10 days before and Washington Mutual ran out of capital to run its business.

And the walls came crashing down on September 29th when news spread throughout the country that the US House of Representatives rejected the bailout bill and as the shockwaves spread, the Stock Market collapsed.

Let’s look at the following article from

The stock market crash of 2008 occurred on Sept. 29, 2008. The Dow Jones Industrial Average fell 777.68 points in intraday trading.1 Until the stock market crash of 2020, it was the largest point drop in history.

The market crashed because Congress rejected the bank bailout bill.2 But the stresses that led to the crash had been building for a long time.

On Oct. 9, 2007, the Dow hit its pre-recession high and closed at 14,164.53.1 By Mar. 5, 2009, it had dropped more than 50% to 6,594.44. Although it wasn’t the greatest percentage decline in history, it was vicious.

Important: The stock market fell 90% during the Great Depression. But that took almost four years. The 2008 crash only took 18 months.

Had the 2008 recession begun and will the US House of Representatives vote in the 700-billion-dollar bailout?

First, yes Congress did vote “yes” to the 700-billion-dollar bailout, but was that enough? Was the USA heading for a recession and was there any good news?

No, not enough was done to stop the “recession train” as unemployment rose and 159 million jobs were lost from the previous month, according to the US Labor Department.

The Dow dropped on October 6 over 800 points and below the 10,000 mark for the first time in over 4 years.

The Federal Reserve in October lowered the rate to 1% (25) as the Libor rate rose its lending rate to 3.46%. In return, the DOW market was spiraling downward to the tune 15% for the month.

The recession, what is a recession or what causes a recession? I went to to find out more a term that is being used today and with great frequency in our newspapers.

A recession is a significant decline in economic activity, lasting more than a few months. There’s a drop in the following five economic indicators: real gross domestic product, income, employment, manufacturing, and retail sales.

People often say a recession is when the GDP growth rate is negative for two consecutive quarters or more. But a recession can quietly begin before the quarterly gross domestic product reports are out. That’s why the National Bureau of Economic Research measures the other four factors.

That data comes out monthly. When these economic indicators decline, so will GDP.
Additionally, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months…” The NBER is the private non-profit that announces when recessions start and stop. It is the national source for measuring the stages of the business cycle.

Now we have the five factors, the organization that determines if we are in a recession, the business analysis, and a time determination of the economic decline.

One must agree that the 2008 Great Recession was the worst economic catastrophe since the 1929 Great Depression.

Recession, whether weeks, months or even a couple of years are detrimental to each taxpaying citizen. How does this effect you or me?

First off unemployment—Unemployment rises as it effects the manufacturing sector which means loss of jobs not to be filled.

Many businesses and business sectors are affected and end up going out of business.
Consumer purchases fall whether it be big purchases such as houses, cars, and other big-ticket items. Smaller items that were to be purchased are then shelved to make way for the “must need” or essential items such as food, clothing, rent, electricity.

If you are a manufacturer and your company lays off its personnel or quits hiring it will affect other businesses as we watch how other companies’ business models are set up.
Growth in the economy is based on supply and demand and when manufacturing employees are laid off, production slows, sales drop off, and businesses quit expanding, then the economy is ripe for a recession.

The personnel layoffs affect monthly increases in the unemployment market causing the person unemployed to look for a job that may pay less, have no benefits, not be able to “make ends meet” and result in bankruptcy, loss of home, car, belongings and mental health.

If you ask, what is the difference between a recession and a depression? Time, simply put recessions are 6 to 18 months and depressions such as the Depression of 1929 lasted for nearly 10 years.

And the results, very similar—In fact, the warning signs and the results are very similar.
Let us close out December 2008 with the following news—At that the Federal Reserve dropped their fed funds to 0%.

This was the lowest in history! That was the good news, but the bad news is that banks had less money to lend. And for more bad news, the Dow ended the year under 10,000 points to a lowly 8, 776.39 or down nearly 34% for the year.

The Great Recession of 2008 had come to a close and we were to embark on 2009 or the year of ending the recession or so we thought?

Thank you for reading and a special thanks for the various articles including that does a great job breaking down various terms, insightful information and providing how depressions and recessions work.


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