A lot happened ten years ago. We’d just voted Barack Obama into the White House. Billy Mays was here and alive and selling us Hercules Hooks. Shorty had freshly acquired them apple bottom jeans comma boots with the fur. Kitty and I had just entered our senior year of college (holy fuck we’re old).
We were sweet baby angels who did exactly what we were told: get good grades, stay out of trouble, pursue a career where you have both passion and talent. We pushed ourselves to work part-time, take on industry internships, still achieve academically. We’d done it. Our futures felt secure and blindingly bright, like Southern California teeth.
And then the walls came tumbling down.
Much ink has been spilled over the 2008 stock market crash and subsequent economic recession. So you’ll pardon me if I add to the deluge. But my purpose here, ten years after the fateful events that ripped the world economy asunder, is to give a millennial’s eye view of the thing.
Below is my attempt to understand and explain the 2008 crash and recession in a way I couldn’t have ten years ago.
We were seniors in college. I think it’s fair to say we had no idea what was going on at the time, what it meant for our future, and why it all was happening. We didn’t understand why the world our parents, teachers, guidance counselors had promised us just… no longer existed.
We graduated into a situation no one—least of all the class of 2009—was prepared for.
Guys. We were so fucked.
Quick primer on how the stock market and United States economy work, for our babies who grew up in a post-recession world (we’re so old).
“The Fed” refers to the Federal Reserve. It’s the central bank of the United States, and it does four things:
- Conducts monetary policy to promote employment, stabilize prices, and moderate interest rates.
- Acts to minimize and contain system-wide risks.
- Makes sure financial institutions are safe and sound and monitors how they affect the whole system.
- Protects and supervises consumers by analyzing economic developments and administering laws and regulations.
A stock is a tiny piece of a company that you can own. If you invest in stocks, it means you own pieces of companies. By investing in these companies’ stocks, you earn interest when the company makes money.
The stock market refers to the system through which we buy and sell stocks. A lot of the action in the stock market takes place in the New York Stock Exchange on Wall Street. It’s actually multiple stock market indices, including the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite among others.
The stock market rises and falls by points, which are equal to one dollar. So when we say the stock market “fell by 50 points,” we mean that all the stocks in that particular stock market index are now selling for $50 less than they were.
Credit rating agencies like Moody’s and Standard & Poor’s (S&P) assess the credit worthiness of corporate or government loans and give it a score (AAA, for example). Investors then use the score to determine how likely it is the debt will be paid. A good score means the loan is a good investment for the financial institution.
The economy expands and contracts according to factors like the gross domestic product (GDP), employment, and interest rates as determined by the Fed. An expansion is when everything is going super well for the economy! A contraction is when productivity declines, business revenues go down, and companies lay off workers. Unemployment rises so consumers spend less money.
What EXACTLY happened?
On September 29, 2008, the Dow Jones Industrial Average dropped by 777.68 points. At the time, it was the largest stock market point drop in human history. And while “the 2008 crash” itself generally refers to this single event, it was several years of shittiness and several more months of gut-punches in the making.
The subprime mortgage crisis
For the years leading up to the 2008 crash, banks were handing out mortgages like candy to anyone who wanted them. “Wow! How generous!” you might be thinking, “Banks sure are nice to give even the most financially insolvent Americans a chance to own a home!”
Except that these subprime mortgages, as they were called, were incredibly risky, both for the banks and for the homeowners. There’s a reason it’s hard these days to get a loan if you have bad credit and a low income: it’s because those factors indicate you are not able to repay your debt.
Financial institutions bundled up the subprime mortgages with more reliable debt, and the credit rating agencies slapped a really good rating on the whole package. So investors bought the whole kit and kaboodle, including the subprime mortgages, under the false impression that it was a solid investment. Spoiler alert: it was not a solid investment.
Oh, and those mortgages the banks were handing out to anyone with a pulse? They came with variable interest. Which means the home buyers might be paying 2% interest on their mortgage one year… and 20% interest the next. Which, for people who might not have been able to afford a mortgage in the first place, is a swift ticket to foreclosure.
RIP Lehman Brothers
Shady investments in subprime mortgages were basically the fuse that traveled to the dynamite of giant banks taking unreasonable risks.
When I say “unreasonable risks” I mean that the banks were over-leveraged. Here’s an example of how leverage works: if you have an income of $100,000 and a mortgage of $300,000, you’re leveraged 3 to 1.
Now imagine that on the scale of an investment firm or mortgage lender playing with bajillions of dollars worth of loans. And they were leveraged 100 to 1.
These financial institutions essentially had very little capital (liquid money they could move around) and a staggering number of liabilities in the form of these debt bundles. Which… they… called assets??? For some reason??? Owning someone’s debt is all well and good for collecting interest, but it doesn’t really benefit you if the borrower can’t actually pay it off.
One of these financial giants, the Lehman Brothers, declared bankruptcy on September 15, 2008. And that’s when the shit really hit the fan.
Lehman’s shitty risk management policies means they were one of the most over-leveraged and worst hit by the subprime mortgage crisis. And when they collapsed, they took down their investors with them, both corporations and individuals.
It was dramatic af: employees of Lehman Brothers were literally given a moment’s notice to vacate the building.
These titanic banks were so ridiculously over-leveraged that their collapse would have been disastrous for the whole world. People would have suffered even more than they did if something wasn’t done to save them.
Just after Lehman Brothers went down, a bill was put before Congress to have the Fed lend money to the banks so they could weather the storm. Congress turned down the bill. Lehman Brothers was toast. When the reality of just how toasty they were became apparent, Congress reconsidered the bill.
“Too big to fail” is one of the most frustrating terms in economic history. Because it doesn’t mean “Failure literally cannot occur because this financial institution is so large and therefore stable.” It means “This bank is so large that if they were to fail—even because of their own shitty decisions—it would be fucking disastrous for the rest of us so we cannot allow that to happen.”
Which is basically the situation the Fed was facing with the subprime mortgage crisis, the stock market going down in flames, and banks being over-leveraged. So the Fed bailed out the banks. The government gave the banks money to cushion their loans, at staggeringly generous interest rates—money that came from the tax payers.
This resulted in budget deficits for… just about everything else our taxes pay for. It all went to saving the financial sector instead.
But things were better after the bailout! Right? Everything went immediately back to normal! Right? … Right?
In the end, the economy contracted by 0.3 percent by October, 2008. 240,000 jobs were lost that month alone. This officially meant the country was in a recession that would last for the next four years.
Who’s to blame?
Much finger-pointing has gone on in the wake of the Recession. Here are some of the common scapegoats.
What the everloving hell were they doing handing out subprime mortgages like Oprah with free cars? Why were they leveraging themselves so drastically? Why didn’t they see that compelling S&P to bury a bunch of subprime mortgages in a pile of reliable loans would eventually end in disaster?
Was it pure greed? Selfishness? Were they all blinded by the high of success? After all, it’s easy to take risks—even really, really big risks—when everything has been going your way for a decade.
But then, the first thing I ever learned about the stock market is that it fluctuates. What goes up must come down. Stock market booms, housing bubbles… make hay while the sun is out, yes, but don’t set the fucking barn on fire behind you!
If those motherfuckers in Congress hadn’t waited a month to pass the bailout bill, maybe the recession never would’ve happened. Or maybe it wouldn’t have been so bad.
But to be completely fair, it’s easy to see why they didn’t want to bail out the banks. After all, the banks were careless and greedy enough to get themselves into that mess, so why the hell should the rest of us get them out of it?
The Federal Reserve
Then there’s the Fed. It is literally their job to regulate and monitor things so that shit like recessions never happen. WHERE WERE YOU GUYS ON THIS ONE? YOU HAD ONE JOB. ONE EXTREMELY COMPLEX, IMPORTANT, DIFFICULT JOB. BUT STILL.
Irresponsible lending is one thing. But consumers didn’t have to take the loans.
Except, in the words of Professor Mark Blyth of Brown University, “When you have wage stagnation for the majority of Americans for almost, if not, in some cases, more than a generation, how do you fill in the gap? People load up on credit on the expectation they’ll pay it off with higher wages but they don’t have the higher wages; they just have a ton of debt. So when they become unemployed, they become insolvent like the banks and they drag each other down.”
Consumers were desperately trying to get ahead. They trusted the mortgage lenders, trusted S&P, trusted real estate agents not to steer them down a destructive path. How were they to know their trust was badly misplaced?
It’s easy for me to sit here, a decade later, and judge people for accepting variable interest rate mortgages they couldn’t reasonably afford in the middle of a housing bubble. But if the system had worked as it should, most of those people would never have been eligible for such self-destructive banking in the first place.
The 2008 crash and recession was due to a fucking Jenga tower of precarious situations that compounded on each other until it all came toppling down. So if you’re looking to place blame, look no further than the entire global economy. Which, y’know, is all of us.
They say the stock market recovered in 2013. But for the average citizen, the damage had been done.
During the months after the 2008 crash, millions of people lost their jobs. Incomes fell. The value of assets like homes and stock investments fell. People lost money they’d been saving for decades. Consumers stopped buying things, companies went out of business, and nobody was hiring.
Congratulations to the class of 2009!!!!!!
No bank bailout or soaring stock prices can make up for the permanently stagnated career prospects of those who started their adult lives in the recession. None of it will fix things for retirees who suddenly found themselves with nothing after a lifetime of careful investing. And it certainly doesn’t offer much hope to the people who lost their homes and ruined their credit in the subprime mortgage crisis.
The effects of the 2008 crash and recession are real. While researching this piece I kept thinking that the problem just looked like a bunch of fluctuating numbers floating around in the ether. Stocks, points, interest rates—they’re all just imaginary concepts wielded by people who have nothing to do with me.
Except that’s not true at all. The global economy connects us all in so, so many ways. The human cost of an economic downturn is staggering. 10,000 people lost their lives to suicide as a direct result of the 2008 crash. Another 500,000 are believed to have died as a result of losing their healthcare along with their jobs. Families became homeless. The elderly went begging.
Economics is devastatingly personal. The decisions made on Wall Street and Capitol Hill affect our intimate lives in ways both seen and unseen every day. And if that doesn’t frighten you, then you’ve got ‘nads of solid granite.
Much of the research for this article came from Michael Lewis’s The Big Short: Inside the Doomsday Machine. Highly recommended.
I also listened to a great interview from On the Media between Brooke Gladstone and Professor Mark Blyth, whose Scottish accent made the horrifying details of the 2008 crash so much more pleasant to hear.
The archives of The Economist and The New York Times were seriously helpful in laying out how things went down.
Lastly, I recommend getting real drunk and watching the 2010 documentary Inside Job. Hide your breakables before you get to the part that’ll make you want to smash things.
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- I’m Proud to Be a Millennial So Fuck You
- What We Talk About When We Talk About Student Loans
- Get Busy Living or Get Busy Dying: Finance Philosophy Explained by The Shawshank Redemption
- Maury Povich Confirms Labor Shortages ARE the Father of American Business Ethics
- “Poor People Are Poor Because They Are…”