2009 Financial Crisis Explanation with Timeline

February

Feb. 13—Congress approved the $787 billion economic stimulus package. It boosted economic growth by granting $288 billion in tax cuts, $224 billion in unemployment benefits, and $275 billion for "shovel-ready" public works. It also included a $2,500 college tuition tax credit, an $8,000 tax credit for first-time homebuyers, and a deduction of sales tax on new car purchases.

The American Recovery and Reinvestment Act extended unemployment benefits and suspension of taxes on those benefits through 2009. It provided $54 billion in tax write-offs for small businesses. It was the fiscal stimulus that ended the Great Recession. 

Feb. 18—Obama announced a $75 billion plan to help stop foreclosures. The Homeowner Affordability and Stability Plan was designed to help the 7 million to 9 million homeowners avoid foreclosure by restructuring or refinancing their mortgages before they got behind in their payments. Most banks wouldn't allow a loan modification until the borrower missed three payments. HASP provided a $1,000-a-year principal payment for borrowers who stayed current on the loan. It was paid out of the Troubled Asset Relief Program funds.

Feb. 27—The Bureau of Economic Analysis’s final report revised its U.S. gross domestic product growth rate for the fourth quarter of 2008 to a negative 6.3%. That was worse than the 3.8% drop it reported in its advance report. It was also the worst slowdown since Q1 1982 when GDP fell 6.1%.

The recession caused demand to slump. Economic growth for all of 2008 was an anemic -0.1%.

March

March 5—The Dow dropped to 6,594.44. It was a total decline of 53.4% from its peak close of 14,164.53 on Oct. 9, 2007. That was worse than any other bear market since the Great Depression of 1929.

April

The Making Homes Affordable Program was launched to help homeowners avoid foreclosure. The Homeowner Affordable Refinance Program is one of its programs. It was designed to stimulate the housing market by allowing up to 2 million credit-worthy homeowners who were upside-down in their homes to refinance, taking advantage of lower mortgage rates. 

The Obama administration introduced HARP in April 2009. By 2016, the program had helped more than 3.3 million people.

October

The unemployment rate rose to 10% in October 2009, the worst since the 1982 recession. Almost 6 million jobs were lost in the 12 months prior to that. Employers added temporary workers, too cautious about the economy to add full-time employees. 

The fields of health care and education continued to expand. That often happens during a recession. Some people react to unemployment by getting sicker from the stress. Others return to school to get a new skill.

Why Not Let the Banks Go Bankrupt?

There was a lot of anger about the billions in taxpayer dollars used to bail out the banks. Many people felt there was no oversight. They thought the banks just used the money for executive bonuses. They agreed that banks should not have been rescued for making bad decisions based on greed.

The argument was that, if we had just let the banks go bankrupt, the worthless assets would have been written off. Other companies would have purchased the good assets and the economy would have been much stronger as a result. In other words, the government should have let capitalism do its thing.

That's what Former Treasury Secretary Hank Paulson attempted to do with Lehman Brothers. The result was a market panic. It created a run on the ultra-safe money market funds. That threatened to shut down cash flow to all businesses, large and small. In other words, the free market couldn't solve the problem without government help. Banks needed the funds to write down their losses and avoid bankruptcy.

Effect

The bank bailout bill stopped the bank credit panic, allowed Libor rates to return to normal, and made it possible for everyone to get loans.

Without the credit market functioning, businesses are not able to get the capital they need to run their day-to-day business. Without the bill, it would have been impossible for people to get credit applications approved for home mortgages and even car loans. In a few weeks, the lack of capital would have led to a shut-down of small businesses, which can't afford the high-interest costs.

Also, those whose mortgage rates reset would see their loan payments jump. This would have caused even more foreclosures. The Great Recession would have been a global depression. The bailout affected you by lowering interest rates, making it possible for the housing market to recover.