Crash! Stock market plummets
Dan Zalewski III
Today marks the 8th anniversary of the 2008 financial market crash.
During the late 2000s, the United States suffered the largest stock market crash since the Great Depression in 1929. Despite its singular day of recognition, the 2008 financial crisis was a multi-year process of economic downturn and federal involvement. It would later be coined the Great Recession.
The focal point of the Great Recession comes from the United States’ housing market.
The market over the course of the 2000s had a large construction boom in the wake of the Russian debt crisis of the late 90s. The United States began building more and more houses because of the surplus of foreign money coming into the country.
With the creation of new homes, the banking corporations in the United States needed to figure out how to sell them. Banks decided to start offering mortgages to more individuals who would normally not be qualified to receive mortgages.
Beyond riskier lending, banks also used financial agreements called mortgage-backed securities to provide a way for individuals to invest in the housing market. These securities based their value off of mortgage payments and housing prices. That meant that investors made money if there were more people taking out mortgages.
In order to continue making money for their investors, banks continued lowering the requirements to qualify for a mortgage. This also allowed a great stream of houses to be sold, which increased the prices of houses.
Another factor is that many of these subprime mortgages were adjustable rate mortgages. This meant that payments at first were extremely low. After an introductory period, those rates would then adjust to the market and monthly payments would increase dramatically.
When the adjustable rates kicked in and payment skyrocketed, many of the risky borrowers that would not have normally qualified for these mortgages could not pay their mortgages and a wave of foreclosures hit the market.
Those foreclosures caused the value of the mortgage-backed securities to free fall. The resulting losses dragged the entire stock market down.
The height of the free fall occurred eight years ago today when the Dow Jones Industrial Average fell over 777 points, the largest fall in the history of the Dow Jones.
The recession led to not only the failure of many large banking corporations that bought into the mortgage-backed securities, but of other industries too. The auto industry saw a large downturn and many large auto manufacturers were forced to claim bankruptcy.
The recession also led to one of newly elected President Barack Obama’s first big political moves, the American Recovery and Reinvestment Act of 2009. Known as the stimulus package, it was the first major obstacle that the president had to face in such tough economic times.
Today the Great Recession is still used as a talking point of political nature. The nation has seemed to recover from the economic downturn, but like most recessions the people are still weary of its effects years later.