The Outcomes of The 2008 Market Crash

The 2008 market crash was a catastrophe to say the least, and will serve as the primary example of a “bubble” for many years to come. On September 29, 2008, the Dow Jones Industrial average fell 777 points in a single day, which was the largest single day drop to that point in history. On a surface level, it plummeted because Congress rejected the bank bailout bill, but the stresses that actually caused the crash had been building for many years.

The Dow Jones Industrial average opened 2007 at 12,459.54. It appreciated alongside major concerns about the subprime mortgage crisis. On November 17, 2006, the Commerce Department of the US warned that the most recent new home permits were roughly 28 percent lower than the same time period from the same months of the year before. Most economists failed to see how big of an issue this would really be, and were actually happy that the overinflated real estate market was returning to “normal.” They failed to see how this decrease in purchasing would affect defaults. Falling home prices triggered defaults on massive amounts of subprime mortgages simultaneously. The Fed decided to add liquidity by way of purchasing banks’ subprime mortgages. In October, economists raised major red flags about the overuse and danger of CDO’s (Collateralized Debt Obligations, basically a bunch of lackluster debts that had been grouped together and given inaccurate ratings) and derivatives. In November of that year, Treasury Secretary Hank Paulson tried to alleviate some of this downward pressure by launching a so-called “Superfund” that would serve to purchase toxic bank debt. The idea was that by doing this the government would take on some of the risk that banks were dealing with and help banks out of a constantly deepening rabbit-hole. As the year ended, economists were actually very optimistic because our GDP had actually grown .5 percent despite this potential crisis. The Dow ended the year in a great position and it appeared as if the liquidity crisis had been defeated,

Starting 2008, the economy lost 17,000 jobs but the Dow was largely unaffected. The Dow took a reasonable large dip after the bailout of Bear Stearns, but then took a major hit after Lehman Brothers was forced to file for bankruptcy. The Fed then bailed out AIG, effectively taking ownership and frantically paying off credit default swaps against failed MBS’s. On September 19, the Fed established a $122 billion fund with banks to buy commercial paper from money markets to try and help pay off all of the obligations coming due. The next day, the bank bailout bill failed, causing the Dow to plummet 777 points. The effects were felt all over the globe. Oil prices fell, gold prices rose, the London FTSE dropped 15 percent, and the MSCI World Index fell 6 percent in a single day.

Congress did eventually pass a bank bailout bill, but only after 159,000 jobs had been lost, and many people had completely lost faith in the US economy. On October 6, the Dow dropped 800 points (new record), putting it below 10,000. It was undeniable that we were in a recession.

240,000 jobs were lost in October 2008. The Fed eventually dropped the interest rate to 0%, and the Dow ended the year 34% the previous year. The recession was officially ended by Obama’s economic stimulus plan, but the lessons learned and pain felt would not disappear anytime soon.