The events surrounding The Great Recession of the past two years have eclipsed most of the other economic events in this decade. Take a walk back in time - who would have thought back in 1999 how so much would change in just ten years?
1. Dow Drops 50% in 17 Months
Between October 9, 2007 and March 6, 2009, the Dow Jones Industrial Average dropped 50%. This was the worst decline since the Great Depression, when the Dow fell 80%. However, it occurred in only 17 months, while the Great Depression drop took three years.
2. $787 Billion Stimulus Package
The main purpose of President Barack Obama's $787 billion Economic Stimulus package was to prevent the re-emergence of the panic that gripped investors in 2008. It was to be spent over three years. It has been criticized for not fixing the economy fast enough. By July 2009, over $179 billion was allocated to Federal agencies. It was only supposed to spend $185 billion in 2009. It was designed to increase GDP growth by 1.4%-3.8% by the end of 2009, and prevent 2.3 million job losses. In Q3 2009, the economy would have only grown .7%, not 2.8%, without the Economic Stimulus Program.
3. China Emerges as World Economic Power
China's economy continues to grow at 8%, despite the global recession. It produces $7.9 trillion, making it the world's third largest economy (after the EU and the U.S). China is the largest banker to the U.S., owning $800 billion of U.S. Treasuries. This gives it leverage. For example, in August 2007, China threatened to sell part its holdings if Congressional pressure to raise the value of the yuan continued.
4. $700 Billion Bank Bailout Bill
On September 18, 2008, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke asked Congress for the largest bailout package since the Great Depression. By October 3, the Senate passed the $700 billion bailout bill, now known as the TARP program. The program was initially designed to purchase toxic mortgages from banks, freeing up cash for more loans. However, it was taking too long to implement, so on October 14, the Treasury used $350 billion for the Capital Repurchase Program, which purchased preferred stock in major banks.
5. The Day the Global Banking System Stopped Working
On Wednesday September 17, banks withdrew $160 billion from ultra-safe money market accounts. Banks were hoarding cash for write-downs on bad mortgages and withdrawals in bank runs. By the end of the week, banks held $190 billion in cash, as opposed to a normal $2 billion reserve. Hoarding led to an increase in LIBOR, which affects $360 trillion in loans and credit card assets. The credit freeze led to a cash shortage for most businesses. In response, the Federal Reserve lowered interest rates to zero, reducing LIBOR. However, banks continue to hoard cash today to write down foreclosures.
6. AIG Bailout
On Tuesday, September 16, AIG, the world's largest insurance company, announced it was going bankrupt. Federal Reserve Chairman Ben Bernanke said that AIG's bailout made him more angry than anything else in the recession. Like a hedge fund, AIG took risks with unregulated products, such as credit default swaps. It wrongly used cash from people's insurance policies. The Fed stepped in to avoid the collapse of the $3.6 trillion money-market fund industry, which invested in AIG debt and securities. Most mutual funds also owned AIG stock.
7. Lehman Brothers Collapse
On Monday, September 15, 2008, Lehman Brothers announced bankruptcy. This was the day after Treasury Secretary Paulson said no more bailouts. He refused government protection for Lehman's $60 billion in uncertain mortgage assets in a weekend negotiation with potential buyers Barclay's and Bank of America. At the time, he thought the amount was too much, and he was being pressured to keep the government off the hook. Now, it seems like small potatoes. Lehman's Brothers bankruptcy panicked global bankers, leading to The Great Recession.
8. Costliest Hurricane of All Time
On August 29, 2005, Hurricane Katrina hit land, causing economic losses of $125 billion. Only $66 billion of this was insured. Half of the losses were a result of flooding in New Orleans. It caused GDP growth to drop from 3.8% in Q3 to 1.3% in Q4. It affected 19% of U.S. oil production and caused oil prices to rise $3 a barrel.
9. 9/11 and the Iraq War
The 9/11 attack led to increased defense spending - first in Afghanistan and second in Iraq. By 2006, the War on Terror had increased the defense budget to $600 - $700 per year, creating an annual budget deficit of $500 billion per year. By 2007, the debt had almost doubled to $9.2 trillion - without spending a penny of bailout or stimulus money.
10. 2001 Recession
With 29 months of job losses, we all thought this was going to be the worst recession in this decade. If only! It was caused by the bursting of the dot.com bubble in March 2000. It was cured by record-low interest rates, providing the fuel for the housing bubble, and The Great Recession.
