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.
Why is the Gop not Running on Stopping Nancy Pelosi
from destroying the economy again like she did in 2008 ?
That a Great 2018 midterm AD .
Gop are you listening here ?
I have always believed it was intentional and orchestrated.
I remember a congressman, from Pennsylvania I think, that came forward and stated that someone was making a run and selling off stocks or something and Bush closed the markets early. He gave one interview and was silent after that. FReepers figured it was Soros that precipitated the crash and the CongressCritter was silenced..
Yes Bush was President, but the Congress was Democrat. Before this event, McCain was still leading in the polls. When this happened, McCain suspended his campaign to go to DC and vote in the Senate to fix this. Obama, oh so coolly, announced ‘if they need me, they can call me’. Obama immediately rose in the polls and the rest is history. Does anyone think Obama didn’t know what was going on?? His pResidency was orchestrated to give the Globalists all the power. I’m hoping his 8 years wasn’t enough and we can rise like a Phoenix from the ashes of his destructive pResidency. Trump has made a good start.
Democrats, Democrat policies, Democrat inaction, and Democrats telling Republicans they were lying about a coming financial crisis - even calling it a “lynching.”
https://www.youtube.com/watch?v=cMnSp4qEXNM
https://www.youtube.com/watch?v=ebWJ892h5dA
https://www.youtube.com/watch?v=90X74V-hS7U
https://www.youtube.com/watch?v=BMPPGlOpUiM
I remember when McCain stopped campaigning to rush back to DC.
I thought at that time - after this this crisis and the Obama cult of personality, he doesn’t have a chance against the “hope and change” express.
It started when someone withdrew billions from the money market in the space of two hours.
It was a financial attack, an act of war that then president Bush mentioned.
And then it was quickly covered up.
Putting that aside, the economic collapse began when Nancy Pelosi's democrats took over the HoR in 2006. People saw what was coming and in natural self preservation began the contraction in economic activity.
There are no coincidences. Cui bono?
Yep. Can’t remember his name, but I do remember he was a Democrat. He’s no longer in the Congress (surprise, surprise).
I predict that eventually the student loan issue will result in loans being written off. It could happen in stages. For example, they could first change bankruptcy laws so that student loans can be discharged in bankruptcy. Then, decisions could be made for loan repayments to be limited to a small percentage of their income, with the rest being written off.
When people such as that Ocasio-Cortez woman get in positions of power, a mindset that these poor students shouldn’t have to repay, will result in policy decisions which wipe out their loan debt.
George Soros was behind it I’m sure. He’s done this before, wanted in Hungary and other countries.
“Destroying America will be the culmination of my life’s work”
He’s tanked the currencies in several countries.
Democrats, Democrat policies, Democrat inaction, and Democrats telling Republicans they were lying about a coming financial crisis - even calling it a “lynching” of Franklin Raines to suggest anything was wrong.
https://www.youtube.com/watch?v=cMnSp4qEXNM
https://www.youtube.com/watch?v=ebWJ892h5dA
https://www.youtube.com/watch?v=90X74V-hS7U
https://www.youtube.com/watch?v=BMPPGlOpUiM
I think he gave one interview about it, there used to be video, then he disappeared.
“Wait till the school debt crisis hits. At least with real estate there was a building left to sell.”
Absolutely. Giving student loans to heads full of mush majoring in creative writing, ethnic studies, or just about any other “humanities” with no prospect of them being able to repay it is way worse than no-down, interest only liars loans to people with no or part time jobs.
I listen to Dave Ramsey every so often and the number of people calling in saddled with huge student loans is stunning.
I wonder what the red flag will be warning the bubble is about to burst.
If the degrees being handed out were worth the paper they are printed on this wouldn’t be an issue. If it is a good investment, you would have the income as a result of the degree to pay the loans.
The author is knowledgeable about economics so his chatter sounds like it must be informed. Your analysis is correct however and his is wrong.
Government forced sub-prime market collapsed and then hidden killer trades and movements to kick the wobbly legs and bring it all down. Lots of misdirection since.
The price tag for the Wall Street bailout is popularly put at $787 billion—---the actual size of TARP--the Troubled Assets Relief Program. But TARP is just the best known program in an array of more than 30 overseen by Treasury Department and Federal Reserve that have paid out or put aside untraceable money to bail out financial firms and inject money into the markets.
To get a sense of the size of the real $14 trillion bailout, see MJ chart at web site. A guide to the pieces of the puzzle includes massive untraceable Treasury Department bailout programs.
Money Market Mutual Fund: In September 2008, the Treasury controlled by Obama/Emanuel announced that it would insure the holdings of publicly offered money market mutual funds. According to the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), these guarantees could have potentially cost the federal government more than $3 trillion [PDF].
Public-Private Investment Fund: This joint Treasury-Federal Reserve program bought toxic assets from banks and brokerages—as much as $5 billion of assets per firm. According to SIGTARP, the government's potential exposure from the PPIF is between $500 million and $1 trillion [PDF].
TARP: As part of the Troubled Asset Relief Program, the Treasury controlled by Obama/Emanuel made loans to or investments more than 750 banks and financial institutions. $650 billion has been paid out (not including HAMP; see below). As of December 21, 2009, $117.5 billion of that has been repaid.
Government-sponsored enterprise (GSE) stock purchase: The Treasury controlled by Obama/Emanuel bought $200 million in preferred stock from Fannie Mae and another $200 million from Freddie Mac [PDF] to show that they "will remain viable entities critical to the functioning of the housing and mortgage markets."
GSE mortgage-backed securities purchase: Under the Housing and Economic Recovery Act of 2008, the Treasury controlled by Obama/Emanuel may buy mortgage-backed securities from Fannie Mae and Freddie Mac. According to SIGTARP, these purchases could cost as much as $314 billion ---SNIP---.
LONG READ---go to web site to read more and checkout the shocking financial charts.
SOURCE http://motherjones.com/politics/2009/12/behind-real-size-bailout
I have always thought this was engineered by the Dems as their ‘October surprise’.
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