The Global Economic Crisis: A Chronology

The Global Economic Crisis
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About Us. Community Development Advisory Council. Materials and Videos from Featured Events. Impact Investing in St. Community Banking in the 21st Century. Useful Links Careers. Doing Business with the St. Louis Fed. Voices of the Fed How is your community reflected in our work? The Financial Crisis. Purpose The financial crisis section of the website was created to provide the public with relevant information and resources about the major financial events and policy action during the financial crisis.

Many planned to sell their homes before then. When home prices fell in , they couldn't sell. They couldn't afford the higher monthly payments from the interest rate reset. As a result, they were facing foreclosure. As bad as that was, it was better than December's 97 percent increase year-over-year. January's existing home sales rate fell to its lowest level in 10 years. The 4. Housing inventory was 4. It reached 5. Foreclosures were up 60 percent year-over-year. It was about the same as January's 57 percent foreclosure increase. They didn't want other banks to know they held a lot of subprime mortgage debt on their books.

In its role of "bank of last resort," it became the only bank willing to lend. The Board also initiated a series of term repurchase transactions.

A Chronology of Crisis Response Measures

These were day term repurchase agreements with primary dealers. The subprime mortgage crisis dried up the secondary market for these debt products. No one knew who had the bad debt or how much was out there. All buyers of debt instruments became afraid to buy and sell from each other.

No one wanted to get caught with bad debt on their books. But the problem was not just one of liquidity, but also of solvency. Banks were playing a huge game of musical chairs, hoping that no one would get caught with more bad debt. The Fed tried to buy time by temporarily taking on the bad debt itself. It protected itself by only holding the debt for 28 days and only accepting AAA-rated debt.

It wanted JP Morgan to purchase Bear and prevent bankruptcy. If it had gone under, these securities would have become worthless.

The U.S. Financial Crisis | Council on Foreign Relations

That would have jeopardized the global financial system. It had halved the interest rate in six months. The two government-sponsored enterprises would buy mortgages from banks. All goes well if the mortgages are good, but if they turn south, then the two GSEs would be liable for the debt. Treasury Secretary Hank Paulson thought this would take care of the problem.

The U.S. Financial Crisis

They underestimated how extensive the crisis had become. These bailouts only further destabilized the two mortgage giants. Los Angeles police warned angry IndyMac depositors to remain calm while they waited in line to withdraw funds from the failed bank.

About people worried they would lose their deposit. Wall Street's fears that these loans would default caused Fannie's and Freddie's shares to tumble. This made it more difficult for the private companies to raise capital themselves. It allowed the government to run the two until they were strong enough to return to independent management. They could also borrow from the Treasury.

Authors and Affiliations

Last but not least, Treasury was allowed to purchase their mortgage-backed securities. Paulson and Bernanke sponsored a weekend negotiation with the nation's top bankers to salvage investment bank Lehman Brothers. When Paulson said no, the two suitors walked out of the government-sponsored talks. Paulson was unwilling to let the government take on all the risk in the financial markets. At the time, he thought Lehman's bankruptcy wouldn't trigger a global disruption because it wasn't large enough. But the panic that resulted proved that an unregulated industry, like investment banking, could not function without government intervention.

Financial markets reeled. Treasury bond prices rose as investors fled to their relative safety. Oil prices tanked.

Early tremors: February to June 2007

The Great Recession was a global economic downturn that devastated world financial markets as well as the banking and real estate industries. Markets cope very well with good news. Perils of Taming Inflation 6. Regional Data and Reports. Declines accelerate in , which will see the largest single-year drop in U. Its main theoretical argument is that declining interest rates and increasing deregulation lower the opportunity cost of alternative investments and raise speculative incentives for investors in global financial markets. Provisions include exempting many banks from stress tests, repealing the Volcker Rule, stripping the Consumer Financial Protection Bureau of much of its power, and easing many other regulations on financial institutions.

The American International Group Inc. The company had insured trillions of dollars of mortgages throughout the world. If it had fallen, so would the global banking system. Bernanke said that this bailout made him angrier than anything else. AIG took risks with cash from supposedly ultra-safe insurance policies. That's where companies keep their cash. On September 17 , the attack spread. If it had continued, businesses couldn't get money to fund their day-to-day operations.