The Financial Crisis Five Years Later RE SP ON SE , RE F ORM, AN D PROG RE SS U.S. Department of the Treasury S E P T E M B E R 2 0 1 3
Introduction In the fall of 2008, our economy faced challenges on a scale not seen since the Great Depression. The crisis was caused by many factors. Among them were an unsustainable housing boom fueled in part by the easy availability of mortgages, financial institutions taking on too much risk, and the rapid growth of the nation’s financial system with regulations that were designed for a different era. Forces built up over many years until the crisis reached its apex in September of 2008. In the span of a few weeks, many of our nation's largest financial institutions failed or were forced to merge to avoid insolvency. Capital markets— essential for helping families and businesses meet their everyday financing needs—were freezing up, dramatically reducing the availability of credit, such as student, auto, and small business loans. Market participants, consumers, and investors were rapidly losing trust in the stability of America’s financial system. Faced with this reality, the federal government moved with overwhelming speed and force to stem the panic. The first series of actions, including broad-based guarantees of bank accounts, money market funds and liquidity by the Federal Reserve, were not enough. Realizing that additional tools were needed to address a rapidly deteriorating situation, the Bush Administration proposed the law creating the Troubled Asset Relief Program (TARP). That measure, which was passed by Congress with bipartisan support, was signed into law by President Bush on October 3, 2008. Some of the programs under TARP were implemented by the Bush Administration. The Obama Administration continued these and added others, utilizing its authority under TARP to keep credit flowing to consumers and businesses, help struggling homeowners avoid foreclosure, and prevent the collapse of the American automotive industry, which alone is estimated to have saved one million jobs. But putting out the fires of the crisis was not enough. To address the underlying causes of the crisis, we had to modernize our regulatory framework and put powerful consumer financial protections in place. That is why President Obama took up the mantle of financial reform by championing and enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act. Americans now have a dedicated consumer financial protection watchdog, financial markets are more transparent, and the government has more tools to monitor risk, and resolve firms whose failure could threaten the entire financial system. As we approach the five-year anniversary of the height of the crisis, the financial system is safer, stronger, and more resilient than it was beforehand. We are still living with the broader economic consequences, and we still have more work to do to repair the damage. But without the government’s forceful response, that damage would have been far worse and the ultimate cost to repair the damage would have been far higher. The financial crisis reminds us that we must remain vigilant to emerging risks in the system. The financial system is dynamic and firms are innovative. And as sources of risk change, regulation and oversight must keep pace.
A BRIEF HISTORY OF THE Financial Crisis
History of the Financial Crisis: The Economy Before, During, and After the Crisis R E C E S S I O N +300 +4.9 R E C E S S I O N +3.9 +3.9 +3.7 +3.2 +3.1 +2.8 +2.8 +2.8 +2.7 +2.5 +2.0 +0 +1.6 +1.5 +1.4 +1.3 +1.2 +0.1 +1.2 +0.3 -0.4 -1.3 -2.0 -300 -2.7 Private Sector Job Growth Real GDP Growth -600 Thousands -5.4 Percentage Points -900 -8.3 Jan '07 May '07 Sep '07 Jan '08 May '08 Sep '08 Jan '09 May '09 Sep '09 Jan '10 May '10 Sep '10 Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13 2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3 2009:Q4 2010:Q1 2010:Q2 2010:Q3 2010:Q4 2011:Q1 2011:Q2 2011:Q3 2011:Q4 2012:Q1 2012:Q2 2012:Q3 2012:Q4 2013:Q1 2013:Q2 The financial crisis triggered the worst recession since the Great Depression, which ultimately destroyed almost 9 million jobs and shrank the economy by hundreds of billions of dollars. The crisis was caused by, among other things, an unsustainable housing boom as shown below. The severity of the crisis is also illustrated by the rapid increase in corporate bond spreads in the fall of 2008 as well as the dramatic fall in household net worth . INDEX (JAN 2000 = 100) $80T 2000 Corporate Bond Spreads 200 $60T 1500 Basis Points Real $40T 1000 HIGH YIELD Housing Household 150 Prices Net Worth $20T Case-Shiller 500 2012 dollars 20-City Composite 100 $0 INVESTMENT GRADE 0 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 2000 '01 '02 '03 '04 '05 '06 2007 '08 '09 '10 '11 '12 '13 2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 3 SOURCE: S&P, FEDERAL RESERVE, BLS, BEA, U. MICH, BARCLAYS.
History of the Financial Crisis: Mid-2007 to 2010 2,000 120 Sept. 2008 Oct. 3, 2008 Dec. 12, 2007 Jan. 20, 2009 Jul. 21, 2010 Dec. 17, 2010 Fannie Mae and Freddie TARP financial Fed establishes President Obama Dodd-Frank Act Enactment of payroll Mac conservatorship stabilization first liquidity tax holiday and takes office. signed into law. package facility and first temporary Lehman Bros. TARP investment enacted. currency swap extensions of 2001, bankruptcy authority reduced lines with other 2003, and many Feb. 2009 and limited to AIG stabilization effort 1,800 110 central banks. 2009 tax cuts . existing programs. Financial Stability Plan Treasury guarantees announced. money market Recovery Act signed. mutual funds. 1,600 100 Mar. 3, 2009 TALF program launched to S & P 5 0 0 help revive credit markets. I N D E X L E F T A X I S Mar. 23, 2009 C O N S U M E R 1,400 90 PPIP program S E N T I M E N T announced to help I N D E X revive mortgage finance market. R I G H T A X I S Apr. 2, 2009 1,200 80 G-20 finance ministers announce coordinated response to global financial crisis. Mar. 2008 Bear Stearns collapses. 1,000 70 Fed establishes Sep. 27, 2010 Primary Dealer Small Business Jobs Act enacted, creating Credit Facility . Jun. 2009 the Small Business Lending Fund (SBLF) Jul. 2008 First large banks and State Small Business Credit FDIC intervenes in repay TARP funds. Initiative (SSBCI). IndyMac Bank. GM and Chrysler Housing and Economic 800 60 complete restructuring . Recovery Act (HERA) enacted Oct. 3, 2010 Authority to make new Sep. 29, 2008 May 7, 2009 commitments under R E C E S S I O N TARP ends. The Dow falls Large bank stress test D E C 2 0 0 7 – J U N 2 0 0 9 778 points. results released. 600 50 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ‘ 0 7 2 0 0 8 2 0 0 9 2 0 1 0 4 SOURCE: BLS, BEA, U. MICH.
History of the Financial Crisis: Progress Made and Work Remaining PERCENT OF LABOR FORCE BILLIONS OF 2012 DOLLARS 12 $1,800 R E C E S S I O N Business lending has increased by 21 percent since Wall Street Reform 10 $1,700 Real Commercial was enacted in July 2010. and Industrial Lending 8 $1,600 Unemployment 6 $1,500 While unemployment has declined R E C E S S I O N to 7.3 percent from its October 4 $1,400 2009 peak of 10 percent, it is still Long-Term too high, and long-term 2 Unemployment $1,300 unemployment remains a concern. (27+ weeks) 0 $1,200 2007 '08 '09 '10 '11 '12 '13 2007 '08 '09 '10 '11 '12 '13 PERCENT OF GDP 2012 DOLLARS R E C E S S I O N $80T 10 R E C E S S I O N Federal Deficit Household wealth has grown since the recession, but has further to go Quarterly* $75T 8 before reaching pre-crisis levels. $70T 6 $65T The federal budget deficit rose as 4 a result of the recession, but since $60T ACTUAL CBO then it has fallen at the fastest pace PROJECTIONS 2 in 60 years and is projected to UNDER THE Real Household $55T PRESIDENT’S continue falling under the Net Worth BUDGET 0 President’s Budget. $50T 2007 '08 '09 '10 '11 '12 '13 '14 '15 2007 '08 '09 '10 '11 '12 '13 * SEE NOTES. 5 SOURCE: FEDERAL RESERVE, TREASURY, CBO.
THE GOVERNMENT’S Crisis Response
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