Real Estate Financial Crisis of 2007–2009

About a Series of Financial Market Events

Starting in July 2007, which were the proximate cause of a weakening of the global economy.

The financial crisis of 2007–2009 began in July 2007 when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve, Bank of England and the European Central Bank. The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008. In September 2008, the crisis deepened, as stock markets worldwide crashed and entered a period of high volatility, and a considerable number of banks, mortgage lenders and insurance companies failed in the following weeks.

Although America's housing collapse is often cited as having caused the crisis, the financial system was vulnerable because of intricate and highly-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such high levels of leverage, and generally a "hypertrophy of the financial sector" (financialization). 


The crisis in real estate, banking and credit in the United States had a global reach, affecting a wide range of financial and economic activities and institutions, including the:
  • Overall tightening of credit with financial institutions making both corporate and consumer credit harder to get;
  • Financial markets (stock exchanges and derivative markets) that experienced steep declines;
  • Liquidity problems in equity funds and hedge funds;
  • Devaluation of the assets underpinning insurance contracts and pension funds leading to concerns about the ability of these instruments to meet future obligations:
  • Increased public debt public finance due to the provision of public funds to the financial services industry and other affected industries, and the
  • Devaluation of some currencies (Icelandic crown, some Eastern Europe and Latin America currencies) and increased currency volatility,
The first symptoms of what is now called the late 2000s recession ensued also in various countries and various industries. The financial crisis, albeit not the only cause among other economic imbalances, was a factor by making borrowing and equity raising harder.


Share in GDP of US financial sector since 1860.The previous major financial crisis occurred in 1929 to 1933. A financial crisis occurs when there is a disorderly contraction in money supply and wealth in an economy. It is also known as a credit crunch. It occurs when participants in an economy lose confidence in having loans repaid by debtors. This causes lenders to limit further loans as well as recall existing loans.

The financial/banking system relies on credit creation as a result of debtors spending the money which in turn is 'banked' and loaned to other debtors. As a result a relative small contraction in lending can lead to a dramatic contraction in money supply. The Great Depression occurred after a dramatic expansion in debt and money supply in the roaring twenties. Total US private credit market debt as a percentage of GDP reached 250% in 1929. The next time debt exceeded this level in the USA was in 1999 reaching a peak of 350% prior to the bubble bursting.

A dramatic contraction then occurred between 1929 and 1933 as debt was defaulted upon and resulted in a 'contraction' in money and wealth. The debt deflation theory coined by Irving Fisher formed the basis of the regulation subsequently introduced by Congress.

The Glass-Steagall Act was passed by Congress in order to prevent this occurring again. It was found that financial firms encouraged debt to be invested in the stock market which then overheated the stock market. The act was designed to prevent this by separating the advising from the lending role of financial institutions. Following its repeal by Congress in 1999, institutions could advise and lend setting up a direct conflict of interest in many 'deals'.

The framework which created the great depression from a regulatory point of view were 're-created' by the repeal of this act. Financial firms could profit in the short term by simply setting up and lending on deals using others' money.

A sequence of rapid debt expansion occurred including a dot-com bubble, which was followed by an equity and housing bubble and then a commodity bubble. Without the debt expansion which measured $14 Trillion USD some analysts have argued that there would have been no economic growth in the USA between 1996 and 2006.

The Global financial crisis is the unwinding of the debt bubbles between 2007-2009.

Cause of the financial crisis

In August 2002 an analyst identified a housing bubble. Dean Baker wrote that from 1953 to 1995 house prices had simply tracked inflation, but that when house prices from 1995 onwards were adjusted for inflation they showed a marked increase over and above inflation-based increases. Baker drew the conclusion that a bubble in the US housing market existed and predicted an ensuing crisis. It later proved impossible to convince responsible parties such as the Board of Governors of the Federal Reserve of the need for action. Baker's argument was confirmed with the construction of a data series from 1895 to 1995 by the influential Yale economist Robert Shiller, which showed that real house prices had been essentially unchanged over that 100 years.

A common claim during the first weeks of the financial crisis was that the problem was simply caused by reckless, sub-prime lending. However, the sub-prime mortgages were only part of a far more extensive problem affecting the entire $20 trillion US housing market: the sub-prime sector was simply the first place that the collapse of the bubble affecting the housing market showed up.

The ultimate point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis.  The failure rates of subprime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses.

For many months before September 2008, many business journals published commentaries warning about the financial stability and risk management practices of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.

Beginning with failures caused by misapplication of risk controls for bad debts, collateralization of debt insurance and fraud, large financial institutions in the United States and Europe faced a credit crisis and a slowdown in economic activity. The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities. Moreover, the de-leveraging of financial institutions further accelerated the liquidity crisis and caused a decrease in international trade. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. At the end of October a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.

The role of central banks

Economists of the Austrian School have proposed that the crisis is an excellent example of the Austrian Business Cycle Theory, in which credit created through the policies of central banking gives rise to an artificial boom, which is inevitably followed by a bust. Proponents of this theory have predicted the current financial crises, and argue that central banks should not be involved in debt markets.

The history of the yield curve from 2000 through 2007 illustrates the role that credit creation by the Federal Reserve may have played in the on-set of the financial crisis in 2007 and 2008. Treasury yield is one tool of monetary policy.

The yield curve (also known as the term structure of interest rates) is the shape formed by a graph showing US Treasury Bill or Bond interest rates on the vertical axis and time to maturity on the horizontal axis. When short-term interest rates are lower than long-term interest rates the yield curve is said to be “positively sloped”. This in turn encourages an expansion in money supply and in turn favors debt induced bubbles. When long-term interest rates are lower than short-term interest rates the yield curve is said to be “inverted”. This favors a contraction in money supply. When long term and short term interest rates are equal the yield curve is said to be “flat”. The yield curve is believed by some to be a strong predictor of recession (when inverted) and inflation (when positively sloped).

Other observers have doubted the role that monetary policy plays in controlling the business cycle. In a May 24, 2006 story CNN Money reported: “…in recent comments, Fed Chairman Ben Bernanke repeated the view expressed by his predecessor Alan Greenspan that an inverted yield curve is no longer a good indicator of a recession ahead.”

A positively sloped yield curve allows Primary Dealers (such as large investment banks) in the Federal Reserve system to fund themselves with cheap short term money while lending out at higher long-term rates. This strategy is profitable so long as the yield curve remains positively sloped. However, it creates a liquidity risk if the yield curve were to become inverted and banks would have to refund themselves at expensive short term rates while losing money on longer term loans.

Following the bursting of the Dot-com bubble in 2000 and the Stock market downturn of 2002 the US Federal Reserve reacted by sharply lowering short-term interest rates. The Fed lowered the Fed Funds target rate beginning in January 2001 at 6.5% to a nadir of 1% in June 2003. The Fed also held rates at this low level for an unusually long period of time (1yr) until June 2004. This prolonged period of stimulative Federal Reserve monetary policy created a very positively sloped yield curve. The yield on the 3-month T-bill reached its lowest point (0.88%) for the cycle in the late 2003 while at the same time 30-year T-bond rates were in excess of 5%.

The inflationary effect of the prolonged period of a very positively sloped yield curve resulted in inflation of asset prices rather than a general increase in the price level of all goods and services. The reason this happened was likely due to the cheap goods that were imported from BRIC economies prevented any inflation. The excess money was channeled into various assets. Without a globalised economy this may not have happened. In particular, it led to a United States housing bubble that began to attract attention as early as 2002 but reached its peak in 2005.

In June 2004 the Fed began to slowly increase Fed Funds rates and the yield curve slowly narrowed. Fed Chairman Alan Greenspan notably described this narrowing of spreads between short term and long term rates as a “conundrum” during testimony in February 2005. The chairman expected long term rates to rise in line with short term rates. However, the tightening of monetary policy caused by rising short term rates was slowing the economy and reducing demand for long-term borrowing.

The Fed raised Fed Funds target rates to a peak of 5.25% in June 2006. By October 2006 the yield curve on 90-day T-bills vs 30-year T-bonds was essentially flat indicating neutral monetary policy (neither stimulative nor contractionary). While the Fed maintained Fed Funds rates at this high level, long term rates began to fall causing the yield curve to become more and more inverted. The yield curve was most strongly inverted in March 2007 when concern about current inflation was reaching its peak.

Commodity bubble

The narrowing of the yield curve from 2004 and the inversion of the yield curve during 2007 indicated a bursting of the housing bubble and a wild gyration of commodities prices as moneys flowed out of assets like housing or stocks. A commodity bubble was created following the collapse in the housing bubble. The price of oil rose to over $140 dollars per barrel in 2008 before plunging as the financial crisis began to take hold in late 2008. A similar bubble in oil prices has preceded other historical economic contractions.

Sub-prime lending

Based on the assumption that sub-prime lending precipitated the crisis, some have argued that the Clinton Administration may be partially to blame, while others have pointed to the passage of the Gramm-Leach-Bliley Act by the 106th Congress, and over-leveraging by banks and investors eager to achieve high returns on capital.

Some, like American Enterprise Institute fellow Peter J. Wallison, believe the roots of the crisis can be traced directly to sub-prime lending by Fannie Mae and Freddie Mac, which are government sponsored entities. On 30 September 1999, The New York Times reported that the Clinton Administration pushed for sub-prime lending: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people."

In 1995, the administration also tinkered with Carter's Community Reinvestment Act of 1977 by regulating and strengthening the anti-redlining procedures. It is felt by many that this was done to help a stagnated home ownership figure that had hovered around 65% for many years. The result was a push by the administration for greater investment, by financial institutions, into riskier loans. A 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $467 billion of mortgage credit poured out of CRA-covered lenders into low and mid level income borrowers and neighborhoods.

Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that "There weren’t enough Americans with (bad) credit taking out loans to satisfy investors’ appetite for the end product. (Investment banks and hedge funds) used (financial technology) to synthesize more of them. They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans." 

On September 30, 1999 The New York Times said, referring to the Fannie Mae Corporation easing credit requirements on loans purchased from lenders: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."

Former employees from Ameriquest, which was United States's leading wholesale lender, described a system in which they were pushed to falsify documents on bad Ameriquest mortgages and then sell them to Wall Street banks eager to make fast profits. There is growing evidence that such mortgage frauds may be at the heart of the Financial crisis of 2007–2009.


In 1992, the 102nd Congress weakened regulation of government sponsored enterprises Fannie Mae and Freddie Mac with the goal of making available more money for the issuance of home loans. The Washington Post wrote: "Congress also wanted to free up money for Fannie Mae and Freddie Mac to buy mortgage loans and specified that the pair would be required to keep a much smaller share of their funds on hand than other financial institutions. Where banks that held $100 could spend $90 buying mortgage loans, Fannie Mae and Freddie Mac could spend $97.50 buying loans. Finally, Congress ordered that the companies be required to keep more capital as a cushion against losses if they invested in riskier securities. But the rule was never set during the Clinton administration, which came to office that winter, and was only put in place nine years later."

Other deregulation efforts have also been identified as contributing to the collapse. In 1999, the 106th Congress passed the Gramm-Leach-Bliley Act, which repealed part of the Glass-Steagall Act of 1933. This repeal has been criticized for having contributed to the proliferation of the complex and opaque financial instruments which are at the heart of the crisis.

Over-leveraging, credit default swaps and collateralized debt obligations

For many months before September 2008, many business journals published commentaries warning about the financial stability and risk management practices of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.

This began with failures caused by misapplication of risk controls for bad debts, collateralization of debt insurance and fraud. 

Another probable cause of the crisis -- and a factor that unquestionably amplified its magnitude -- was widespread miscalculation by banks and investors of the level of risk inherent in the unregulated collateralized debt obligation and Credit Default Swap markets. Under this theory, banks and investors systematized the risk by taking advantage of low interest rates to borrow tremendous sums of money that they could only pay back if the housing market continued to increase in value.

The risk was further systematized by the use of David X. Li's Gaussian copula model function to rapidly price Collateralized debt obligations based on the price of related Credit Default Swaps. This formula assumed that the price of Credit Default Swaps was correlated with and could predict the correct price of mortgage backed securities. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies. According to one article: "Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril... Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees."

The pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. It has been estimated that the "from late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds...out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi."

The average recovery rate for high quality CDOs has been approximately 32 cents on the dollar, while the recovery rate for mezzanine CDO's has been approximately five cents for every dollar. These massive, practically unthinkable, losses have dramatically impacted the balance sheets of banks across the globe, leaving them with very little capital to continue operations . 

Boom and collapse of the shadow banking system

In a June 2008 speech, U.S. Treasury Secretary Timothy Geithner, then President and CEO of the NY Federal Reserve Bank, placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities: "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion." He stated that the "combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles."

Nobel laureate Paul Krugman described the run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible--and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect."

Systemic crisis

Another analysis, different from the mainstream explanation, is that the financial crisis is merely a symptom of another, deeper crisis, which is a systemic crisis of capitalism itself. According to Samir Amin, an Egyptian economist, the constant decrease in GDP growth rates in Western countries since the early 1970s created a growing surplus of capital which did not have sufficient profitable investment outlets in the real economy. The alternative was to place this surplus into the financial market, which became more profitable than productive capital investment, especially with subsequent deregulation.  According to Samir Amin, this phenomenon has lead to recurrent financial bubbles (such as the internet bubble) and is the deep cause of the financial crisis of 2007-2009.

John Bellamy Foster, a political economy analyst and editor of the Monthly Review, believes that the decrease in GDP growth rates since the early 1970s is due to increasing market saturation.

Growth of the housing bubble

The housing bubble grew up alongside the stock bubble of the mid-1990s. People who had increased their wealth substantially with the extraordinary run-up of stock prices were spending based on this increased wealth. This led to the consumption boom of the late 1990s, with the savings rate out of disposable income falling from five percent in the mid-90s to two percent by 2000. The stock-wealth induced consumption boom led people to buy bigger and/or better homes, since they sought to spend some of their new stock wealth on housing.

The next phase of the housing bubble was the supply-side effect of the dramatic increase in house prices, as housing starts rose substantially from the mid-1990s onwards. Baker notes that if the course of the bubble in the United States had followed the same pattern as in Japan, the housing bubble would have collapsed along with the collapse of the stock bubble between 2000-2002. Instead, the collapse of the stock bubble helped to feed the US housing bubble. After collectively losing faith in the stock market, millions of people turned to investments in housing as a safe alternative. In addition, the economy was very slow in recovering from the 2001 recession, the weakness of the recovery leading the Federal Reserve Board to continue to cut interest rates - one of numerous occasions where the Fed cut rates in response to a crisis, a pattern of behavior that had, by that time, become known as a Greenspan put. Fixed-rate mortgages and other interest rates hit 50-year lows. To further fuel the housing market, Federal Reserve Board Chairman Alan Greenspan suggested that homebuyers were wasting money by buying fixed rate mortgages instead of adjustable rate mortgages (ARMs). This was peculiar advice at a time when fixed rate mortgages were near 50-year lows, but even at the low rates of 2003 homebuyers could still afford larger mortgages with the adjustable rates available at the time.

The bubble began to burst in 2007, as the building boom led to so much over-supply that prices could no longer be supported. Prices nationwide began to head downward, with this process accelerating through late 2007 and into 2008. As prices decline, more homeowners face foreclosure. This increase in foreclosures is in part voluntary and in part involuntary. It can be involuntary, since there are cases where people who would like to keep their homes, who would borrow against equity if they could not meet their monthly mortgage payments. When falling house prices destroy equity, they eliminate this option. The voluntary foreclosures take place when people realize that they owe more than the value of their home, and decide that paying off their mortgage is in effect a bad deal. In cases where a home is valued far lower than the amount of the outstanding mortgage, homeowners may be able to simply walk away from their mortgage.

Effects of the financial crisis

Economic effects and projections
Main article: Late 2000s recession
Irving Fisher's debt deflation theory'
According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs:
  1. Debt liquidation and distress selling.
  2. Contractions of the money supply as bank loans are paid off.
  3. A fall in the level of asset prices.
  4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
  5. A fall in profits.
  6. A reduction in output, in trade and in employment.
  7. Pessimism and loss of confidence.
  8. Hoarding of money.
  9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

Global aspects

A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse. The continuing development of the crisis prompted fears of a global economic collapse. The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years. Three days later UBS economists announced that the "beginning of the end" of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms "the worst is still to come". UBS quantified their expected recession durations on October 16: the Eurozone's would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters.

At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the Reagan recession of 1981 and 1982 with negative 2009 growth for the US, Eurozone, UK and Canada; very limited recovery in 2010; but not as bad as the Great Depression.

It was widely argued that an international crisis required an international solution. In The Keynesian Resurgence of 2008 / 2009, the economist John Maynard Keynes was widely cited as providing the best insight into the kind of policy response required, including the need for international coordination of economic policy responses. Keynes recognised that a Fiscal stimulus in the presence of a financial crisis was unlikey to restore growth.

US aspects

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent. Real disposable personal income decreased 8.7 percent. Nouriel Roubini, professor of economics at New York University and chairman of RGE Monitor, predicted a recession of up to two years, unemployment of up to nine percent, and another 15 percent drop in home prices. Moody's Investors Service continued in October 2008 to project increased foreclosures for residential mortgages originating in 2006 and 2007. These increases may result in downgrades of the credit rating of bond insurers Ambac, MBIA, Financial Guaranty Insurance Company, and CIFG. The bond insurers, meantime, together with their insurance regulators, are negotiating with the Treasury regarding possible capital infusions or other relief under the $700 billion bailout plan. In addition to mortgage backed bonds, the bond insurers back hundreds of billions of dollars of municipal and other bonds. Thus, a ripple effect could spread beyond the mortgage sector should there be a major downgrade in credit ratings or failure of the companies. 

Credit Crunch Terms

Since the 2007 global recession started even the most financially unaware people have had to learn odd sounding financial terms such as Libor - the London Interbank Offered Rate - which is the rate at which banks in London lend to each other. Other increasingly popular terms include: deleveraging (paying off one's debts), Dead Cat Bounce (a short rally without fundamental support after a big crash on the stock market), and Chapter 11 (reorganization in bankruptcy). 

Official prospects

On November 3, 2008, the EU-commission at Brussels predicted for 2009 an extremely weak growth of GDP, by 0.1 percent, for the countries of the Euro zone (France, Germany, Italy, etc.) and even negative number for the UK (-1.0 percent), Ireland and Spain. On November 6, the IMF at Washington, D.C., launched numbers predicting a worldwide recession by -0.3 percent for 2009, averaged over the developed economies. On the same day, the Bank of England and the Central Bank for the Euro zone, respectively, reduced their interest rates from 4.5 percent down to three percent, and from 3.75 percent down to 3.25 percent. Economically, mainly the car industry seems to be involved. As a consequence, starting from November 2008, several countries launched large "help packages" for their economies.

Political instability related to the economic crisis

In January 2009 the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police due to the government's handling of the economy. Hundreds of thousands protested in France against President Sarkozy's economic policies. Prompted by the financial crisis in Latvia, the opposition and trade unions there organized a rally against the cabinet of premier Ivars Godmanis. The rally gathered some 10-20 thousand people. In the evening the rally turned into a Riot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. In late February many Greeks took part in a massive general strike because of the economic situation and they shut down schools, airports, and many other services in Greece. Police and protesters clashed in Lithuania where people protesting the economic conditions were shot by rubber bullets. In addition to various levels of unrest in Europe, Asian countries have also seen various degrees of protest. Communists and others rallied in Moscow to protest the Russian government's economic plans. Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment has increased.

Beginning February 26, 2009 an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of United States intelligence agencies that the global financial crisis presents a serious threat to international stability.

Business Week in March 2009 stated that global political instability is rising fast due to the global financial crisis and is creating new challenges that need managing. The Associated Press reported in March 2009 that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations." Even some developed countries are seeing political instability. NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off."

Financial markets impacts

2007 bank run on Northern Rock, a UK bank
One of the first victims was Northern Rock, a medium-sized British bank. The highly leveraged nature of its business led the bank to request security from the Bank of England. This in turn led to investor panic and a bank run in mid-September 2007. Calls by Liberal Democrat Shadow Chancellor Vince Cable to nationalize the institution were initially ignored; in February 2008, however, the British government (having failed to find a private sector buyer) relented, and the bank was taken into public hands. Northern Rock's problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions.

Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial. Financial institutions which had engaged in the securitization of mortgages such as Bear Stearns then fell prey. Later on, Bear Stearns was acquired by JP Morgan Chase through deliberate assistance from the US government. Its stock price plunged to $3 in reaction to the buyout offer of $2 by JP Morgan Chase, well below its 52 week high of $134. Subsequently, the acquisition price was raised to $10 by JP Morgan. On July 11, 2008, the largest mortgage lender in the US, IndyMac Bank, collapsed, and federal regulators seized its assets after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac, which it did by placing the two companies into federal conservatorship on September 7, 2008 after the crisis further accelerated in mid to late 2008.

See also: Federal takeover of Fannie Mae and Freddie Mac

The media have repeatedly argued that the crisis then began to affect the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending. While this is true, the reasons given in media reporting are usually inaccurate. Dean Baker has repeatedly explained the actual, underlying problem:

    "Yes, consumers and businesses can't get credit as easily as they could a year ago. There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007 (of course, to clear-eyed analysts, they didn't look too good a year ago either). While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6 trillion in housing wealth and an even larger amount of stock wealth.

    The New York City headquarters of Lehman Brothers.
    Economists, economic policy makers and economic reporters virtually all missed the housing bubble on the way up. If they still can't notice its impact as the collapse of the bubble throws into the worst recession in the post-war era, then they are in the wrong profession."'

    At the heart of the portfolios of many of these institutions were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, threatened an increasing number of firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS.

    Other firms that came under pressure included Washington Mutual, the largest savings and loan association in the United States, and the remaining large investment firms, Morgan Stanley and Goldman Sachs

    The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities. Moreover, the de-leveraging of financial institutions further accelerated the liquidity crisis and caused a decrease in international trade. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. At the end of October a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.

Risks and regulations

As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came to rely on them, accepted as valid some complex mathematical models which theoretically showed the risks were much smaller than they actually proved to be in practice . George Soros commented that "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility." 

Timeline of events

Main article: Subprime crisis impact timeline


  • Financialization (general evolutions in the area of finance which preceded the crisis)
  • Subprime mortgage crisis
  • Systemic risk


  • Mar-2000 Dot-com bubble peak
  • Jan-2001 First Cut in Fed Funds rate for this cycle (from 6.5% to 6.00%)
  • Stock market downturn of 2002
  • Jun-2003 Lowest Fed Funds rate for this cycle (1%)
  • Late 2003 Lowest 3mo T-bill rate for this cycle (0.88%)
  • 2003-2004 Prolonged period of low Fed Funds and positively sloped yield curve
  • Jun-2004 First increase in Fed Funds rate for this cycle (from 1% to 1.25%)
  • 2003-2005 Period of maximum inflation of the United States housing bubble
  • 2004-2006 Slow rise in Fed Funds rate with positively sloped but narrowing yield curve
  • Feb-2005 Greenspan calls long-term interest rate behavior a “conundrum”
  • Jun-2006 Fed Funds reach peak for this cycle of 5.25%
  • Oct-2006 Yield curve is flat

Events of 2007

  • March, 2007 Yield curve maximum inversion for this cycle
  • August, 2007: Liquidity crisis emerges
  • September, 2007: Northern Rock seeks and receives a liquidity support facility from the Bank of England
  • October, 2007: Record high US stock market October 9, 2007 Dow Jones Industrial Average (DJIA) 14,164

Events of 2008

    Main article: Global financial crisis of 2008-2009
  • January, 2008: Stock Market Volatility
  • February, 2008: Nationalisation of Northern Rock
  • March, 2008: Collapse of Bear Stearns
  • June 27, 2008: Bear Market of 2008 declared
  • July 1, 2008: Bank of America buys Countrywide Financial
  • July, 2008: Oil prices peak at $147 per barrel as money flees housing and stock assets toward commodities

  • Main article: Global financial crisis in September 2008
  • September, 2008: Emergency Economic Stabilization Act of 2008
  • September, 2008: Troubled Assets Relief Program
  • September, 2008: Bankruptcy of Lehman Brothers
  • September, 2008: Federal takeover of Fannie Mae and Freddie Mac
  • September, 2008: American International Group#Federal Reserve bailout
  • September, 2008: Merrill Lynch sold to Bank of America Corporation
  • September, 2008: Morgan Stanley and Goldman Sachs confirmed that they would become traditional bank holding companies
  • September, 2008: partial nationalization of Fortis holding
  • Main article: Global financial crisis in October 2008
  • October, 2008: Large losses in financial markets world wide throughout September and October
  • October, 2008: Passage of EESA of 2008
  • October, 2008: Iceland's major banks nationalized Main article: Global financial crisis in November 2008
  • November, 2008: China creates a stimulus plan
  • November, 2008: Dow Jones Industrial Average (DJIA) touches recent low point of 7,507 points
  • Main article: Global financial crisis in December 2008
  • December, 2008: The Australian Government injects 'economic stimulus package' to avoid the country going into recession, December, 2008
  • December, 2008: Madoff Ponzi scheme scandal erupts
  • December, 2008: Belgium government resigns as a result of Fortis nationalization

Events of 2009

Main article: Global financial crisis of 2008-2009
Main article: Global financial crisis in 2009
  • January 2009: Blue Monday 2009 Crash
  • January 2009: U.S. President Barack Obama proposes federal spending bill approaching $1 trillion in value in an attempt to remedy financial crisis
  • January 2009: Lawmakers propose massive bailout of failing U.S. banks
  • January 2009: the U.S. House of Representatives passes the aforementioned spending bill.
  • January 2009: Government of Iceland collapses.
  • February 2009: Canada's Parliament passes an early budget with a $40 billion stimulus package.
  • February 2009: JPMorgan Chase and Citigroup formally announce a temporary moratorium on residential foreclosures. The moratoriums will remain in effect until March 6 for JPMorgan and March 12 for Citigroup.
  • February, 2009: U.S. President Barack Obama signs the $787 billion American Recovery and Reinvestment Act of 2009 into law.
  • February 2009: The Australian Government seeks to enact another "economic stimulus package".
  • February 2009: 2009 Eastern European financial crisis arises.
  • February 2009: The Bank of Antigua is taken over by the Eastern Caribbean Central Bank after Sir Allen Stanford is accused by US financial authorities of involvement in an $8bn (£5.6bn) investment fraud. Peru, Venezuela, and Ecuador, had earlier suspended operations at banks owned by the group.
  • February 23, 2009: The Dow Jones Industrial Average and the S&P 500 indexes stumbled to lows not seen since 1997.
  • February 27, 2009: The S&P index closes at a level not seen since December 1996, and also closes the two month period beginning January 1 with the worst two month opening to a year in its history with a loss in value of 18.62%
  • March 2, 2009: The S&P index finishes the first trading day of March with a drop of 4.7%, the worst opening to a March in NYSE history.
  • March 6, 2009: The UK Government takes a controlling interest in Lloyds Banking Group by insuring their debt.
  • March 8, 2009: United States bear market of 2007–2009 declared
  • March 18, 2009: The Federal Reserve announced that it will purchase $1.15 trillion in US Assets ($750 billion in mortgage backed securities, $300 billion in Treasuries, $100 billion in Agencies) in a bid to prop up liquidity and lending to spur economic growth. The markets initially rallied on the news, however concerns began to grow regarding long term devaluation of the US dollar and subsequent inflation.
  • March 23, 2009: In the United States, the FDIC, the Federal Reserve, and the Treasury Department jointly announce the Public-Private Investment Program to leverage $75–$100 billion of TARP funds with private capital to purchase $500 billion of Legacy Assets (a.k.a. toxic assets).

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