The depression of 2008 has been the worst crash since the Great Depression. There were tell-tale signs that it was about to occur, yet the general majority never gave much attention to it. One example can be seen in The New York Times. The phrase “since the Great Depression” has nearly doubled in print since the previous year, spelling an impending wave of nervousness and insecurity and much of the financial sectors.
The Lehman Brothers, a huge investment banking company went completely bankrupt in September of that year. They were the fourth-largest investment bank in the United States and lost around 25,000 worldwide employees that dreadful month. Groups of reporters swarmed around their company headquarters with justifiable questions, wondering how this 158-year-old giant in the industry suddenly lost all its money.
Since the U.S market, at that time, had many global connections, the market crash invited a worldwide financial collapse, affecting billions of people. People around the world had questions and demanded answers, so let’s explore this dramatic economic decline.
How Did It Start?
The economic decline began in the housing market and later spread to larger sectors, like the heavily developing big tech market. Federal policy encouraged American citizens to delve into the real estate market, and become homeowners themselves. The beginning of this economic boom started around 1930 when the U.S government started to grant mortgage loans, and it went further after WWII when the government gave many war veterans extensive and loose mortgages to use when buying homes. Their expectations were that when urbanization occurs in the cities, then job opportunities and housing demands would eventually rise, which would be positive for the national economy and welfare.
According to the Final Report of the National Commission on the Causes of the Financial and Economic Crisis of the United States, mortgage debts rose almost as much as they had in the country’s entire history between 2001 and 2007. At roughly the same period of time, home prices doubled. Around the world, mortgage salesmen rushed around to ask more Americans to borrow money for a house. The increased supply and demand did not require these salesmen to even check for a credit score, proof of income, job titles, or assets.
Many investment banks and brokerages decided to enter the real estate market and bet on the eventual steady rise of the entire sector. Huge banks like Lehman Brothers, Merill Lynch, and Bear Sterns dropped huge investment sums into the market without much afterthought.
The Inevitable Crash
When investment banks began to publically show that they were losing money on their bets in the real estate market, a record-numbers of investors fled the money market funds in an attempt to escape before they lost too much (since the investment sector for the real estate market had no real set precedent, deeming it very volatile and unpredictable).
On September 17th, the sellers began to grow in number. On average, investors withdraw around $7 billion every week. During this week, retail and institutional investors withdrew around a record $172 billion. This sparked mass market panic and fear.
Two of the largest banks in Wall Street at that time, Goldman Sachs and Morgan Stanley, applied to be regular commercial banks to gain federal support economically.
On September 26th, Washington Mutual Bank went bankrupt when its investors withdrew around $16.7 billion in under 10 days. J.P Morgan later bought the bank for an estimated $1.9 billion.
The stock market eventually collapsed entirely on September 29th, when the U.S House Of Representatives rejected a huge bailout bill. The ones who rejected it only thought that it was unjustified for taxpayers, but they did not realize the overwhelming global reaction that it would create.
The Dow Jones Industrial Average dropped down 770 points, the largest decline in American history. In an attempt to restore stability, the Federal Reserve decided to double its currency swaps with foreign banks in Europe, England, and Japan to $620 billion. Many major governments around the world were required to liquidate all frozen credit markets.
How Do We Predict A Crash In The Future?
The 2008 crash could’ve been entirely preventable. Many prominent analysts and investors expressed fear for the general housing market because of the huge surge in public attention and inefficiency in the mortgage industry.
Nouriel Roubini was quoted in 2005 that the housing market was riding on a speculative wave that would soon drown in the future. In 2006, he reiterated his point that the U.S was in a housing bust and deep recession that would soon affect the rest of the world when the bubble would eventually pop. Keep in mind that this analyst is one of many who predicted the market instability and crash beforehand.
In order to prevent a crash, we must look at the VIX Index, which is also referred to as the CBOE Volatility Index, which captured general fear and panic in the market. Additionally, study moving averages (for a downward trend), short interest, as well as EPS ratio indexes. These all provide crucial information that assists in creating a large market crash. One is indeed coming in the near future, but no one can really conjure an accurate date.