Could it happen again?
Latest Developments
(Updated October 8, 2008) Five economic trends have heralded a dramatic decline of the U.S. economy:- Stock prices have plummeted. The Dow has dropped 39%, from a high of 14,043 in October 2007 to below 8,600 a year later. It dropped 800 points during intra-day trading on October 6, its largest one-day drop ever. European stocks, as measured by the Stoxx 600, fell 7.6%, the U.K.'s FTSE 100 dropped 7.9% and France's CAC 40 slid 9%. These were the largest declines since 1987, and erased $2.5 trillion from global equities. The Stoxx 600 has fallen 34% this year, and trades at 10.1 times earnings, the lowest since the last recession in 2002.
- Business credit has dried up. To restore financial stability, Congress passed an $800 billion bailout to buy back troubled mortgages. Central banks in the U.S. and Europe dropped rates .5%. The Federal Reserve doubled its currency swaps with foreign central banks in Europe, England and Japan to $620 billion, and has agreed to lend directly to businesses that can't find credit. The governments of the world are being forced to provide all the liquidity for frozen credit markets.
- Housing prices have dropped 8% over the past year. The median single family home price has dropped from $229,000 in June 2007 to $213,800. (Source: National Association of Realtors)
- Bank near-failures have taken some of the most prestigous financial services companies, including Lehman Brothers, AIG, Wachovia, Bear Stearns, Washington Mutual and IndyMac Bank as well as many foreign banks.
- Oil prices have recently set new records, with futures prices rising to $147 per barrel in July before settling at $86 per barrel in October. (Source: Bloomberg, Oil Falls as U.S. Supplies Climb Amid Concern of Waning Demand, October 7, 2008)
Background
Stock market losses are due to a rush to safe haven Treasury Bonds and gold as panic has gripped investors concerned about the impact of the credit crisis on the global economy.Housing price declines and foreclosures are a result of mortgage financing reliant upon mortgage-backed securities, which contributed to lax lending standards (See A Primer on the Subprime Mortgage Mess) Banks have literally stopped purchasing them on the secondary market, which means that few mortgages are being issued. This has further depressed the housing market.
Business credit has frozen. Demand for any type of asset-backed commercial paper has virtually disappeared. This panic over the value of these commercialized debt obligations led to the financial sector's crisis, causing the intervention of the Federal Reserve and the Treasury. (See The Federal Intervention in the Mortgage Crisis)
Bank near-failures are a result of their inability to raise funds, either through debt offerings or sale of stock. This has led to a cash flow problem which has caused their demise. In some cases, such as WaMu and IndyMac, depositors have rushed to withdraw their savings, reminiscent of the Great Depression.
Oil prices were high due to a seasonal surge in demand and an investment bubble by traders. However, concerns about a global slowdown in economic growth is causing a return to more normal prices.
