What Exactly Happened In 2008?
We experienced one of the worst financial crises in our country’s history—a crisis that had the affect not only ourselves, but also our children’s children. It cannot be stressed enough that what we faced during that economic upheaval was not just a disruption of credit, but a crisis for the very soul of capitalism.
As Saint Bernard of Clairvaux would warn us, “Hell is full of good intentions or desires.”This was no more apparent than in looking at the terrifying naïveté with which our so-called leaders addressed the economic emergency. As a consequence, many of us suffered because of what our government and business leaders had done both to cause and to further this economic emergency.
Many of us know the after effects of the financial crisis of 2008. But what most people don’t know is exactly what happened to cause it. I’m going to try and explain it here.
In 1971, President Richard Nixon, without the approval of Congress, took the U.S. dollar off the gold standard and changed the rules of money—not just for the United States, but also for the world. Without the approval of Congress, he severed the U.S. dollar’s relationship with gold. He made this unilateral decision during a quietly held two-day meeting on Minot Island in Maine, without consulting his State Department or the international monetary system.
President Nixon changed the rules because foreign countries being paid in U.S. dollars grew skeptical when the U.S. Treasury was printing more and more money to cover our debts, and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. The vault was being emptied because the government was importing more than it was exporting and because of the costly Vietnam War. As our economy grew, we were also importing more and more oil.
This change was one in a series of changes leading to our current financial crisis that began in 2007. In effect, this change allowed the United States to print almost unlimited amounts of money and create as much debt as it wanted.
In everyday terms, America was going bankrupt. We were spending more than we earned. The United States could not pay its bills—as long as our bills were to be paid in gold. By freeing the dollar from gold, and making it illegal to directly exchange dollars for gold, Nixon created a way for the United States to print its way out of debt.
After 1971, the U.S. dollar was no longer money, but rather a currency. For years, people all across the globe have believed that U.S. bonds are the safest investment in the world. For years, savers dutifully bought U.S. bonds, believing that was the smart thing to do. At the start of 2009, 30-year U.S. Treasury bonds were paying less than 3 percent interest. To me, this means there is too much funny money in the world, savers will be losers, and since 2009, U.S. bonds could be the riskiest of all investments.
Was this economic crisis just an accident, a one-off event? Some say yes. I say no.
How can the crisis be solved when the very people and organizations that created the crisis—and profit from it—are still in charge? The problem is that the crisis is not diminishing, as some would hope. It’s getting bigger. In the 1980s, government bailouts were in the millions. By the 1990s they were in the billions. By XXXX they were in the trillions.
In August 2007, panic silently spread throughout the world. The banking system was seizing up. This set in motion a domino effect that threatens even now to bring down the entire world economy.
The following is a brief and by no means comprehensive timeline highlighting some of the major global economic events that led us to the precarious financial state:
August 6, 2007
American Home Mortgage, one of America’s largest mortgage providers, filed for bankruptcy.
August 9, 2007
French bank BNP Paribas, because of problems with U.S. subprime mortgages, announced it couldn’t value assets worth over 1.6 billion euros.
As global credit markets locked up, the European Central Bank injected nearly 95 billion euros into the Eurozone banking system in an effort to stimulate lending and liquidity.
August 10, 2007
A day later, the European Central Bank pumped another 61 billion euros into global capital markets.
August 13, 2007
The European Central Bank released another 47.6 billion euros, the third cash infusion totaling almost 204 billion euros in a span of three working days.
Northern Rock, the largest mortgage broker and a large consumer bank in Britain, experienced a run on the bank by depositors. It was the first bank run in over 100 years.
October 9, 2007
The Dow Jones Industrial Average closed at a historic high of 14,164.
A Year Later
President George W. Bush and the U.S. Treasury asked for $700 billion in bailout money to save the economy, over a year after the European Central Bank had already infused 204 billion euros into the economy in August 2007 and almost a year after the Dow hit its all-time high.
Toxic financial derivatives resulted in the collapse of Bear Stearns and Lehman Brothers and the nationalization of Fannie Mae, Freddie Mac, and one of the world’s largest insurers, AIG.
Additionally, the U.S. auto industry revealed that it was ailing, and GM, Ford, and Chrysler asked for bailout money. Many states and city governments were also now asking for bailout money.
September 29, 2008
On a black Monday, after President Bush asked for bailout money, the Dow plunged 777 points. It was the biggest single-day point-based drop in history, and the Dow closed at 10,365.
October 1, 2008, through October 10, 2008
In one of its worst spans ever recorded, the Dow dropped 2,380 points in a little over a week.
October 13, 2008
The Dow began to exhibit extreme volatility, going up 936 points in one day, the best point gain in history, closing at 9,387.
October 15, 2008
The Dow plunged 733 points, closing at 8,577.
October 28, 2008
The Dow gained 889 points, the second best point gain in history, closing at 9,065.
November 4, 2008
Barack Obama was elected president of the United States with the campaign slogan, “Change We Can Believe In.” He will take over a government that has by now committed $7.8 trillion in various forms to salvage the economy.
It was reported that Americans lost 584,000 jobs in November, the biggest posted loss since December 1974. Unemployment was reported at a 15-year high of 6.7 percent, with nearly two million jobs lost in the United States alone in 2008. Additionally, it was reported that China, the world’s fastest growing economy, lost 6.7 million jobs in 2008, an indication that the global economy was in severe distress and on the verge of meltdown.
Economists finally admitted the U.S. economy had been in a recession since December 2007. One year later, the economists finally figured it out?
GM and Chrysler received $17.4 billion in government loans.
President-elect Obama announced an $800 billion stimulus plan centered on massive infrastructure projects aimed at easing the record U.S. job losses—this was in addition to the $7.8 trillion already committed by the U.S. government.
December 31, 2008
The Dow closed at 8,776, down 5,388 points from its record high achieved just over a year earlier. It was the worst yearly performance for the Dow since 1931 and equated to $6.9 trillion in lost value.
I started this letter with an important date: August 6, 2007. That was the day that American Home Mortgage, one of America’s largest mortgage providers, filed for bankruptcy.
The reason this is important is because it marked the point where debt had gone too far. The global system could not absorb any more debt. On August 6, 2007, the debt bubble burst.
Editor, Rich Dad Poor Dad Daily