Posted on 09/15/2018 7:36:39 AM PDT by yesthatjallen
The gut-wrenching slide of the 2008 stock market crash is unforgettable for those caught in it. In the six weeks from the Lehman Brothers bankruptcy on Sep. 17, the stock market lost over 40 percent of its value.
A quarter of trading days had plunges of 4 percent or more. Investors saw life’s savings dissipate. Traders saw a year’s work and bonus compensation vaporize.
The Federal Reserve and U.S. Treasury, which had been scrambling to cope with the developing financial crisis, accelerated their efforts to a frenetic pace, developing program after program to stem the panic. A chart of the Fed’s balance sheet during this time looks like an EKG gone haywire:
A consequence of the government’s frantic activity was to withdraw nearly a trillion dollars of liquidity from the financial markets over 2008, most of which coincided with the crash. Could the unprecedented policies that squeezed liquidity from the U.S. financial markets inadvertently have triggered the September crash?
Special programs for the crisis
Difficulties in housing and mortgage markets surfaced throughout 2007. In February, sales of existing homes peaked, later to fall 25 percent by September. By June, resale home prices peaked before falling 8 percent by September.
Mortgage foreclosure rates doubled over the course of 2007. Housing market problems led to mortgage market problems, shutting off some banks access to capital.
Responding to the emerging financial crisis in December 2007, the Fed instituted its first programs to maintain credit for financial institutions and provide foreign central banks with dollar funding for their countries’ banks.
March 2008 saw more Fed action. Bear Stearns’ failure and merger needed the Fed’s assumption of questionable assets. Financing problems for primary dealers, the major banks and investment banks licensed to interface directly with the Fed, spurred a program to lend them U.S. Treasury securities to finance operations.
All told, from December 2007 to just before the September 2008 crash, the Fed launched $296 billion of emergency programs to combat the crisis.
Financing these programs was a dilemma for the Fed. Normally, when a central bank sells securities, it receives money out of the regular banking system, which should reduce inflation and/or slow an economy.
Conversely, when a central bank buys securities, it injects money into the banking system, which can speed up an economy and/or increase inflation as banks in turn lend out new money to support economic activity.
Often in a crisis, central banks create money to support emergency lending, but, in the long run, this may be inflationary. The Fed had seen its preferred inflation measure increase from under 2 percent in 2003 to 4 percent in 2008.
A gallon of gasoline was over $4.00. Instead of creating money and risking inflation, the Fed reshuffled its balance sheet, selling Treasury securities to fund emergency programs. The Fed hoped its $296 billion of stimulative emergency lending would offset $290 billion of contractionary securities sales and not affect the banking system or overall economy.
Fed security sales accelerated from $61 billion before March to $229 billion between then and September. Bank lending and investing ground to a halt. From September 2007 to March 2008, bank assets grew 6 percent. From March to September 2008, they fell 1 percent.
The stock market also fell, down 13 percent from December to the crash (measured by the broad-based Wilshire 5000 index).
The 2008 crash
Monday, Sep. 15, 2008 brought bombshell news of Lehman Brothers’ bankruptcy. That day saw a 5-percent decline, followed by a Tuesday bounce of 2 percent accompanying news of AIG’s bailout.
Wednesday saw the market swing sharply down 5 percent, but this was followed by bounces up on Thursday and Friday of 5 percent and 4 percent, respectively. The week of the Lehman bankruptcy and AIG bailout, the stock market actually rose as it had the previous week when rumors swirled of the firms’ demises.
The market slide commenced on Sep. 22 and kept going with a big 8-percent drop on Sep. 29 when Congress initially rejected the bank bailout plan. Final passage of the bailout didn’t help nor did Fed and international central bank guarantees of bank accounts, money market funds or commercial paper.
The market bottomed on Nov. 20, down 41 percent from before Lehman Brothers’ bankruptcy filing.
Rationality isn’t necessarily expected from the stock market, but the 2008 crash’s pattern is curious. The stock market rose as Lehman Brothers and AIG went belly up and plummeted as the world’s most powerful financial authorities introduced program after program to alleviate the crisis. Perhaps there is another explanation.
Financing the Fed during the crisis
The Fed risked running out of resources for emergency lending after selling $290 billion of securities. Its portfolio was down to $485 billion from $719 billion in March, and $200 billion was reserved to finance primary dealers. To provide more resources, Treasury issued debt with proceeds remaining on deposit at the Fed.
Although the procedure is slightly different, the process of Treasury selling debt, obtaining money from the financial markets and leaving it with the Fed has the same contractionary impact as the Fed selling securities directly.
The new Treasury-Fed emergency financing commenced on Sep. 18 with $100 billion in a couple of days. By the following week’s end, $238 billion had been raised. In just seven business days, the Fed and Treasury sold more securities to finance Fed emergency lending than had been done in the previous six months.
To be sure, this funding did not disappear; it was lent to banks through the Fed’s emergency programs, but these distressed banks were filling financial holes and in no position to relend proceeds to recirculate them into the markets and economy.
Even as the Fed began growing its balance sheet in late September and October, banks only slowly increased lending with the crash’s terrible conditions. The Fed and Treasury created a liquidity vacuum where money was withdrawn from the capital markets and economy much faster than it was reinvested with new bank lending.
The brunt of this liquidity vacuum fell on primary dealers transacting directly with the Fed. As the Treasury and Fed issued up to $690 billion of new emergency financing, primary dealers reduced their securities lending by $480 billion by year end.
During this period, there were widespread difficulties with repurchase financing that had lubricated securities markets and funded investment firms.
Doug Carr is president of Carr Capital Co. and an associate fellow at R Street Institute.
Booms always go bust.
It’s only a matter of time.
I remember well people driving down my Florida street, looking at a house for sale and then driving off.
They were both priced out of the market and didn’t feel the house offered good value.
The boom & bust cycles are monitored well by rich people.
Right now, every parcel of land nearby is up for sale or being built on.
The rich are cashing out.
The prices of assets are very high now.
In 2009, prices were low to reasonable.
However, credit was tight. Only people with very good credit ratings could get credit to buy houses.
Slowly, people bought, prices rose modestly.
That encouraged more people to buy, prices rose a little more, banks got a little less risk adverse, more people could get housing loans and buy.
Banks, with loan portfolios full of mortgages property valued at more than loan value, are still lending.
However in 2018, as around 2007, we are now at the point where most creditworthy people have bought into housing.
The Congress has arranged for a corporate tax cut to extend over many years, which will supply a modest amount of demand for housing and remodels.
The federal government is getting better at managing the economy, but stock P/E and housing cost/income ratios will ultimately determine economic activity.
“tsumani of ARM mortgages in California”
The mortgage problem in California was in large part due to a state law that was meant to protect purchasers, but didn’t. This law only applied to purchase mortgages.
The way for lenders to get around the law was to issue purchase mortgages with rising interest rates that the purchasers would have to finance.
But at refinancing time, values had dropped and credit was tight. The ARMs were financial toxic timebombs that exploded.
It’s so sad that I’m not yet 60, but 100% JADED as to the running of this country.
And I’ve been that way for about 40 years, LOL!
Another factor was Hurricane Katrina.
It whacked the Florida housing market.
The ability to buy a house cheap for cash in Florida impacted other areas too.
That’s exactly what it is.
It’s amazing how evil keeps returning in another guise.
“A Republic, if you can keep it”
We were warned, now were struggling to get it back to where it should be.
Yes, we were.
Yeah that's the ticket.
If they had not been so entranced by the beauty of their wife Morgan Fairchild it wouldn't have happened.
Would they care to pull the other one? It has bells on it.
Unfortunately the dummies who got themselves in this bind are not very useful.
Bammy wasn't president in 2008. Although the whole crisis was instigated to get him elected.
Then there was Golden West financial [the Sandler’s bank] giving out super easy loans to hordes of illegals and house flippers...then selling their bank to Countrywide before the SHTF...
The Sandlers being the big communist donors of the Dem Party and the reason all the Dems made their pilgrimages out to California with their hands out.
My daughter saved it with Firefox download helper add on.
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Thanks!
None of it was an accident... the thieves kept the money , claimed losses and got 10 years of free money from the fed... free money meaning that the fed has been stealing from our savings with inflation for 10 years ,, devaluing everything around us... end the fed.
Oops! Sorry mermaid, I may have been a bit too general. Should have qualified with, “most” students in humanities probably won’t be able to repay their student loans.
There are of course exceptions as in everything else. I’d like to see some numbers on the delinquency rates and what if any degrees they got.
Federal student loans smell a lot like what Fannie Mae used to hand out. You don’t need anything to qualify.
“You don’t need a credit check or a cosigner to get most federal student loans. You don’t have to begin repaying your federal student loans until after you leave college or drop below half-time. If you demonstrate financial need, you can qualify to have the government pay your interest while you are in school.”
It’s a time bomb waiting to go off.
Accident my ass. They knew what they were doing. It wasn’t necessary. McLame wasn’t going to win. Deep state trashed. Market to make the party in charge Republicans look bad. All the more reason to reign I the Feds!
No worries!
I do agree with you on many things. I also work part time as a lifeguard (I love that free gym membership!) and several of my workmates are young college age kids with tens of thousands of student loans — usually in total j*** off degrees (sports management, sports medicine, and the total waste of college degree: ANTHROPOLOGY!) These kids are working dead end jobs and tied to ridiculous debt for degrees that get them no where. Worse still, the real young ones are so mentally rigid and afraid to take chances that they can’t think outside the box career wise.
Eventually, you are right, the bomb will go off and it won’t be pretty.
Personally, I worry for my daughter. She’s a very sweet girl, and very smart, but didn’t inherit my tech gene (which came late to me, I will admit.) She’s looking at education (early childhood, no less) and psychology as possible careers. Neither of which pay well, but she’s really intimidated, ironically, by the push to get girls into STEM.
As a fifteen year old, she says, “But MOM, it’s not that I’m afraid of those areas, I just don’t WANT to go into them. But they all seem to have such a big hard-on (her words) to reach some quota for girls in science.”
Out of the mouths of babes. I do tell her that there will always be unhappy people, so she can make a career counseling them.
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