Financial crisis ravishes the economy

January 12, 2009
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The year 2008 was a rollercoaster ride for investors and a period of uncertainty for just about everyone.

The housing boom of 2006 and 2007 was fueled by subprime mortgages made to people with less than perfect credit. There were nearly 2 million subprime loans written within a period of 18 months. When the subprime market imploded in early 2008, it was followed by wave after wave of foreclosures across the nation, as interest rates reset higher on adjustable rate mortgages and people were unable to afford their new monthly payments.

In early 2008, behemoth mortgage financier Countrywide Financial Corp. collapsed

and was bought by Bank of America. Bear Stearns investment bank went under in March, and the government orchestrated its sale to JPMorgan Chase.

In early July, the government stepped in and took over troubled Fannie Mae and Freddie Mac mortgage companies, which controlled nearly $5 trillion of the nation’s mortgages. Things really snowballed in September: Merrill Lynch agreed to sell itself to Bank of America; the Fed seized control of ailing investment giant American International Group; and Lehman Brothers, one of the oldest and largest brokerage firms in New York, filed for Chapter 11 bankruptcy Sept. 15 and sent the already freefalling economy into a tailspin.

Through it all, the stock markets roiled and investor fears only added to the markets’ volatility. Daily drops on Wall Street of 500 points or more became commonplace. Credit tightened so severely, it was literally nonexistent for most borrowers. Skyrocketing fuel prices only added to deepening money woes.

By mid-September, the U.S. financial system was frozen. The Fed came to the rescue once again in early October with the $700 billion Troubled Asset Relief Program, a bailout plan intended to shore up Wall Street.

Secretary of Treasury Henry Paulson asked for an additional $800 billion in late November to unfreeze credit for homebuyers, consumers and small businesses through the creation of a new lending agency called the Term Asset-Backed Securities Loan Facility.

Under TALF, the federal government intends to buy up to $600 billion of debt issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks, all of which are government-sponsored enterprises. Additionally, the Fed will lend up to $200 billion in financing to investors that buy securities tied to student loans, car loans, credit card debt and small business loans.

In November the Fed bailed out the largest U.S. bank: Citigroup. Cash-strapped Chrysler LLC and General Motors Corp., too, began begging for a lifeline, and the Bush Administration announced a $13.4 billion aid package for the automakers in mid-December. 

All of these factors combined to make for a combustible year across the United States, and Michigan was among the hardest hit due to its already frail economy and the heavy weight of the Big Three.

Altogether, about $7 trillion has been pledged or used to date to save America’s economy, and economic analysts agree that a long recession is ahead.

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