To paraphrase T.S. Eliot, the only major British poet born in St. Louis, September 2008 was the cruelest month. As America marks the sixth anniversary of the financial meltdown which began that month and drove the global economy off the cliff and into the worst economic crisis since the 1930s, the damage it did is still being felt. Last year, middle-income families earned 8 percent less, adjusted for inflation, than they did in 2007.
But not everyone was so profoundly affected. Commuter helicopter traffic at the East Hampton airport this summer increased by close to 40 percent over last year. Yet while there is a pretense of recovery and conditions are marginally better, most Americans are still living in the mean teeth of the Great Recession. The U.S. economy is facing many challenges, especially the rising financial inequality between the top 1 percent and everybody else.
You would be right to conclude that the fed’s attempts to deal with the Financial Apocalypse of 2008, reminded you of the note your grade school teacher scrawled on too many report cards: “Could have done better.” To help put this in perspective, here’s a chronology of key events in September 2008.
On Sept. 7, the Federal Housing Finance Agency, backstopped by the Treasury Department, placed Fannie Mae and Freddie Mac into conservatorship. A week later, Merrill Lynch avoided oblivion by hastily selling itself to Bank of America. In the early hours of Sept. 15, Lehman Brothers CEO Dick Fuld, aka the gorilla of Wall Street, announced that his firm was seeking bankruptcy protection after the feds refused to step in and provide financial assistance.
Within hours of the Lehman bankruptcy, the feds rushed forward with an initial $85 billion in taxpayer cash to bail out the giant insurance company American International Group (AIG), essentially nationalizing the firm. AIG had mismanaged itself to the verge of bankruptcy by stuffing its portfolio full of derivative products whose value had collapsed.
Then on Sept. 16, the shares in the world’s oldest money market fund fell below $1 because of losses incurred on the fund’s holdings of Lehman commercial paper and medium-term notes.
To help stabilize the financial system, on Sept. 21 the feds declared Morgan Stanley and Goldman Sachs to be bank holding companies. Five days letter, in the biggest bank failure in American history, the government seized the assets of Washington Mutual, the nation’s sixth largest bank, and its banking operations were sold to JP Morgan Chase.
As the month mercifully wound down, the House of Representatives on the 29th voted down the Bush administration’s Troubled Assets Relief Program (TARP), which would have invested 700 billion taxpayer dollars in troubled banks by purchasing their distressed assets. Needless to say, the stock market reacted with panic to this “failure of democratic government” and suffered one of its worst single-day price declines, with the S&P 500 Index plunging a horrendous 8.8 percent.
Finally, rattled by the market’s obvious panic, Congress passed the Emergency Economic Stabilization Act of 2008 on Oct. 3, which included a cosmetically revamped version of TARP.
The financial markets were still in turmoil over the ensuing weeks. In terms of sheer dollar losses, the “fall of 2008” (along with the fall of many other illusions) was probably the greatest financial disaster in world history. Throughout the world, its cost in terms of shattered wealth and wrecked lives is still being calculated.
The fallout even reached Iceland. The country’s entire banking system collapsed in October when it became apparent that its bank portfolios were stuffed full of American-made toxic derivatives that had little value.
The collapse led to the following exchange on a late-night TV talk show: “What is the capital of Iceland? About $25, give or take.”
Sadly, Iceland was hardly alone.
originally published: September 27, 2014