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.
GW was dumber than we were being told. Worst vote of my lifetime. Oh that’s right, he was Ivy league. Must have been Poison Ivy League.
I don’t know if it’s accurate to say Kanjorski disappeared...He was in Congress until 2011.
From a YouTube search, it appears he did many videos on the crisis over a period of time.
However, this may be the only video where he says:
“Someone” left us in middle of ocean w/o a lifeboat.
Seems there are many video links to this...but he may have only said it once.
https://www.youtube.com/watch?time_continue=1&v=ODBPlD0FXOU
Given what is happening with Google,YouTube, Facebook,etc. I would highly recommend making a personal copy of videos lie this to anyone who is interested!
Same goes for this interesting article (thanks for posting, DJ MacWoW) ...Print it off and save it. Deep State waters run deep...
https://www.washingtontimes.com/news/2011/feb/28/financial-terrorism-suspected-in-08-economic-crash/
Exactly, totally coordinated. Bush either did was he was told to do or he overreacted. It was a perfect storm to usher in Obama.
I’ll clarify what I meant about Kanjoski. I meant that he became silent. The videos that I’ve seen were cuts of the same interview. FReepers talked at the time that Kanjorski fell silent. We surmised that he was told to hush.
Consider the mysterious sell-off in the equity markets on February 27, 2007.
This was the entry point on the short side for some well-informed market participants.
The next warning was major quant funds blowing up in September-October 2007. Historic relationships between markets started to break down then.
S&P 500 topped out on October 31, 2007.
I feel the same way. But if we don’t have an “incident” right before the 2018 election, then I may have to reconsider.
I think you grossly underestimate the value of degrees in wymyn's studies, or Hungarian lesbian art history......
Interesting that Bernanke, whose doctoral work was on the 1929 crash and the failure of the Fed to keep enough money in the system, may have ended up doing the same thing.
If you haven’t seen “The Big Short” or “Margin Call,” these are two phenomenal movies that really get to the heart of this, with only minor SJW preaching.
True, but the housing market was ridiculously overextended. Energy prices may have tipped it, but it was the mortgage lending that was the biggest problem.
Rep. Paul Kanjorski: America's economy was attacked 'by somebody' on September 11, 2008
Or the Fed did it deliberately, and the result was Obama.
Anybody who had advance notice would have made HUGE amounts of money from the crash and subsequent recovery.
From at least the 1980’s, everyone looked the other way while mortgage brokers, appraisers, and real estate agents made sure the numbers came in correctly. At the same time, vices such as bankruptcy were destigmatized. The libs like to blame “predatory lending”. Well IMHO there was a lot of predatory borrowing going on as well.
Hey, slow your roll a bit on the anti-humanities rant please.
I majored in Creative Writing, have both a BA and an MFA and I did just fine with my degrees. Not everyone can be a tech drone.
I made good money as a technical writer for the Harvard Smithsonian Center for Astrophysics, and then at various investment houses in Boston writing corporate and investor communications material.
I’ve also been paid to write in-house training manuals, production materials, etc. I now teach at a high school here in Florida: I’m certified to teach English 6-12, as well as math 6-12.
It’s not the degree sometimes, but the person holding it. In fact, most of my classmates went on to get very lucrative jobs. We have a skill that is marketable. We essentially have a turbo-charged English degree (at no extra cost.)
Hubby’s a lit major and he’d done JUST fine in software marketing.
I think the real problem is that the students being churned out these days are brain-dead drones. My classmates and I (class of ‘90) have all done extremely well in our fields because we were trained to think logically, not dwell in our “fweewings” and be fast on our feet. Conversely, I have a friend who graduated with a sensible computer science degree from MIT who then crashed and burned and is now an environmental and political activist (while wifey earns the bread because she was an affirmative action hire for Lucent Technologies.) Go figure. Respectfully.
You are correct from what I saw (have not studied him in depth), glancing at the titles of his YouTubes, he was a loyal Democrat supporting all Obama initiatives and stopped talking about economic terrorism with that video.
Again, recommend anyone interested should make copies of “special” videos as I believe this one will be scrubbed if there ever is another economic attack...
Bttt!
I agree with you on that!
I have the longer video saved. :-)
It was a half of a Trillion dollars!
Me too :)
What video saving software do you use?
I have the feeling I will be doing a lot more saving going forward...
My daughter saved it with Firefox download helper add on.
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