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.
Nonsense! Crashing the economy right before an election to get the democrats into power??? Absurd!
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At no point in history has any government ever wanted its people to be defenseless for any good reason ~ nully's son
Nut-job Conspiracy Theory Ping!
To get onto The Nut-job Conspiracy Theory Ping List you must threaten to report me to the Mods if I don't add you to the list...
Clinton, Cuomo and Reno were responsible. Bush tried to fix it but was thwarted by congress.
There was no obama administration yet but supporters were probably at work.
There is an odd factor or two. There were several folks around who were predicting this already in 2006 timeframe, and getting no traction because no one from the Fed wanted to hear about the issue.
I might also go back to 1929, and discuss the whole decade prior to that crash...how dozens of warning indicators existed and no one (not the banks, the Fed, Congress, or the President) wanted to step into the middle of the mess.
STROLL DOWN MEMORY LANE Soon as they occupied the WH, Obama placed his COS Rahm Emanuel in control of the US Dept of the Treasury (oversees the conservative-suppressing IRS). Read on.
"Mr President, you are now in complete control of the US Treasury."
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THE SMOKING GUN---WSJ REPORT--On Jan 20, 2009 Timothy Geithner was appointed Obama's Secy of the Treasury. But within three weeks, the Obama White House tightened its grip on Treasury. Obama put his COS, Rahm Emanuel, in charge of Treasury---Rahm Emanuel's dual role was an unusual move.
When he got to Treasury, WH COS Rahm Emanuel was so involved in the inner workings that the phrase "Rahm wants it" had become an unofficial mantra among subservient govt staffers, prostrate in obeisance, scurrying to accede to Rahm's wishes, according to Treasury government officials. Reported by WSJ / 05/31/09
More here: http://online.wsj.com/article/SB124113406528875137.html
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Pres Trump needs to to ask US Treasury officials what exactly Rahm Emanuel and Obama were doing there.
PAUSE TO REFLECT--- As taxpayers were being gulled by the TARP fraud, Obama had tight control of Treasury and spent trillions of tax dollars. Obama calculatedly placed his then-COS Rahm Emanuel in a dual role.......in the WH and at Treasury. Obama had a stranglehold on the US Treasury via COS Rahm Emanuel's dual role.
I’m no fan of the Bush Crime Family, but as I recall he tried twice to reform the subprime lending scam but of course the libs started screaming “racism” and so he backed off like all RINOs do.
Democrats seized both chambers of Congress in January 2007.
They absolutely aided the fed in crushing the economy to bring a democratic radical to power
I agree. The crash had roots going back many years, and a number of factors came together to produce it. Community Housing (bad mortgages) and securitization (banks and mortgage companies made crappy loans, but packaged them and sold them to someone else)are two bit ones.
One of the best books I read on the crash was "The Sellout", by Charles Gasparino, which traces the roots of the crash back to the 80's. It reads like both a history book and a thriller. Highly recommended.
The money came from a little-known fund administered by the Treasury Department for settling litigation claims. The so-called Judgment Fund is taxpayer money Congress has permanently approved in the event it's needed, allowing the president to bypass direct congressional approval to make a settlement.
The U.S. previously paid out $278 million in Iran-related claims by using the fund in 1991. Republicans have decried the payments as ransom, a charge that Obama administration has rejected.....a group of Republican senators announced their support for legislation that would bar payments from the Judgment Fund to Iran until Tehran pays the nearly $55.6 billion that U.S. courts have judged that it owes to American victims of Iranian terrorism.
UPDATE H.J.Ansari Zarif, the deputy for parliamentary and Iranian affairs within Iran’s Ministry of Foreign Affairs, said he would expose "everyone who allegedly accepted bribes" to facilitate Obama's nuke deal with Iran. "... we will reveal which western politicians received monies during nuclear negotiations to make #IranDeal happen,” Mr. Zarif reportedly said. NOTE: Mr Zarif is the FIL of John Kerry' daughter.
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CONCLUSION Looks like Obama and his crowd got filthy rich on this deal. In case you wondered how the Halfrican intended to pay for his billion dollar final resting place dedicated to the Sun God….”Obama’s "presidential center." NOTE: Obama said no federal funds will be used......just tax dollars with an Iranian postmark.
And McCain helped by suspending his campaign.
Hell no they didnt, the dim-0 congress did it and intentionally. Look at the economy for the first 6 years that GW was prez and dim-0s controlled nothing. THEN look what happened after dim-0s took over both houses of congress in jan ‘07.
NOW think about what is likely to happen if the dim-0 sonsofbitches take over congress again in jan of 19.
Bush was still President but Pelosi took over Congress
Something was ‘up’ earlier.
IIRC, it was around February 2007 the Bush economics advisers/officials showed up on the Sunday morning news-talk programs for a couple of weeks. Their talkingpoints were how great the economy was, how solid, no problems, everything looked rosy.
I thought it strange that they were doing such a ‘hard sell’, considering things looked pretty good on the homefront — fly-over country.
By mid summer, we began to hear rumor and read news reports of economic problems, banking problems, etc., and by fall the rumors were turning into truths, and the GW advisers were talking massive bailouts.
[That was pre-Obama. It developed during GW’s 2nd term. I think the earlier news-talk appearances were nothing more than attempts to try to head off what the experts saw coming. They tried to keep things ‘up’ until Bush left office, but they fell short and it hit during GW’s last 2 years.]
It stuck in my mind and shortly after that posting the S&P fell to 12000. I got spooked and I begged my husband to get out of the market and into cash. But we didn't.
If only.
thanx for the heads up
Aquila: the red alert Wilber sounded when the dems get elected by the adult debtors and vote to have the taxpayers pay for their folly.
I suspicion it was Soros as well.
Being it was a financial attack and an act of war, that would make him a legitimate military target.
Technically when the debt is extinguished the remainder is put on the government. IMO the gov,who is you and me, should clawback the tuitions paid for degrees which never supported repayment.
When you push banks into making unsafe loans, the system will eventually collapse.
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