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Thursday, October 16, 2008

The Financial Crash of 2008

I wanted to take a day to re-cap some of the great crash of 2008. I hope that I can look back on this post one day with a sigh of relief that everything straightened itself out sort of quickly & that this moment doesn't mark the beginning of the next Great Depression. I can't believe the market is down 40% from the highs of 2007. Considering the S&P 500 lost over 20% in a single week, people are on all-out panic mode.

I'd started writing this over the weekend, when things were looking particularly bleak. It's really amazing how every day is so volatile and bring a new headline. Following on the heels of my poverty awareness post, I'm inclined to be slightly less panicky. I've still got a job and a house and plenty of money in savings. Yes, my retirement accounts have taken a hit that makes me a bit nauseous at times, but I remind myself I'm years away from retiring & now is a good time to buy.

I've felt in my mind for a long time that many American consumers are living on credit and over-extending themselves. I've also felt that the government has intervened so much in the last 8 years to avoid even small recession that our economy has been artificially inflated by cheap credit and risky investing patterns. It's never fun to be in a recession or a depression, but I believe it's part of the natural economic cycles and it will make the crises that much worse to attempt to avoid natural market corrections, especially in the housing markets.

I do believe there is enough blame to go around. I blame the bankers, the stock brokers, the investors, the lawmakers, the regulators, the oversight commissions, the CEO's & executive boards, the predatory lenders, the no-down payment home buyers and just about everybody. My understanding, from what I've read, is that the mortgage and housing meltdown is one of the many cornerstones of this crises. All of the soaring home values in hot locales, the relaxed lending standards which required very little down, the use of ARM mortagages to qualify for an even larger home loan and dishonest brokers all contribute to the problem.
I'm doing my best to not check my Roth IRA or stock prices everyday. I know not to panic & that I'm young and in a good position for the long term. I'm thinking the real estate market, though it may be soft for a while in Houston, will not crash here locally. My job is very safe, and hopefully H will continue to do well in sales. I just wanted to take a day to stop, breath, and not panic. I've posted a few relevant articles and factoids below. Hopefully, I will be able to look back on these soon and not be in a state of panic. :)

APPENDIX – AP’s “MELTDOWN-ACTIONS SO FAR” – Here are some of the major steps and associated price tags of actions the government has taken this year to deal with the spreading crisis in credit and housing markets: March 11: The Federal Reserve announces a rescue package to provide up to $200 billion in loans to banks and investment houses and let them put up risky mortgage-backed securities as collateral.

March 16: The Fed provides a $29 billion loan to JPMorgan Chase & Co. as part of its purchase of investment bank Bear Stearns.
May 2: The Fed increases the size of its loans to banks and lets them put up less-secure collateral.
July 11. Federal regulators seize Pasadena, Calif-based IndyMac, costing the Federal Deposit Insurance Corp. billions to compensate deposit-holders.
July 30: President Bush signs a housing bill including $300 billion in new loan authority for the government to back cheaper mortgages for troubled homeowners.
Sept. 7: The Treasury takes over mortgage giants Fannie Mae and Freddie Mac, putting them into a conservatorship and pledging up to $200 billion to back their assets.
Sept. 16: The Fed injects $85 billion into the failing American International Group, one of the world's largest insurance companies.
Sept. 16: The Fed pumps another $70 billion into the nation's financial system to help ease credit stresses.
Sept. 19: The Treasury temporarily guarantees money market funds against losses up to $50 billion.
Sept. 29: The Fed makes an extra $330 billion available to other central banks, boosting to $620 billion the amount available to the central bank through
currency "swap" arrangements, where dollars are traded for their currencies. It
also triples to $225 billion the amount available for short-term loans to U.S.
financial institutions.
Oct. 3: President Bush signs the $700 billion economic bailout package.
Oct. 6: The Fed increases a short-term loan program, saying it is boosting short-term lending to banks to $150 billion and that by year's end, $900 billion in potential overall credit will be outstanding. It also says it will begin paying interest on reserves that banks keep with the Fed in hopes of coaxing banks into keeping more money on deposit at the central bank.
Oct. 7: The Fed says it will start buying unsecured short-term debt, so-called "commercial paper," from companies.
Oct. 8: The Fed cuts the federal funds rate a half percentage point, to 1.5 percent. It
follows a one-quarter point cut on April 30 and a three-quarter point reduction
on March 18.
Oct. 8: The Fed agrees to lend AIG another $37.8 billion.


$2.4 TRILLION LOST IN A YEAR – AP: “The Dow lost 128 points, giving the blue chips an eight-day loss of just under 2,400, or 22.1 percent. The average had its worst week on record in both point and percentage terms. The Standard & Poor's 500 index, the indicator most watched by market professionals, posted its worst weekly run since 1933. The latest loss also means the Dow is down 40.3 percent since reaching a record high close of 14,164.53 a year ago, on Oct. 9, 2007. The S&P 500, which reached its high of 1,565.15 the same day, is down 42.5 percent. Investors suffered a paper loss for the day of about $100 billion, as measured by the Dow Jones
Wilshire 5000 index. For the week, investors lost $2.4 trillion, and over the past year, the losses have piled up to $8.4 trillion.

GOOD NEWS OF THE DAY: Off to Little Rock (in the rain) today!


Liza's Eyeview said...

This is a great recap - I learned more here than reading all the CNN stuff coming out on this issue.


Dennis the Vizsla said...

I think that's the first "LOLSenate" picture that I've seen.