What began as a foreclosure crisis morphed into a credit crunch and ultimately triggered recession. The year of 2008 witnessed a colossal shift from one of the most prosperous periods in U.S. history to one of the bleakest.
Of course, the seeds of that transformation found fertile soil long before this calendar year. The lure of bigger houses and nicer things offered pristine dirt for the planting of over-leveraged loans. And the new government-sponsored ethic of universal home ownership helped fertilize such trends with creative financing options for even the most credit-challenged among us.
The American Dream became more about instant gratification and free money than the disciplined prudence and hard work of generations past. It's a new economy, the creditors heralded, one in which credit card limits determine standards of living and new college graduates buy homes larger than those of their parents. Such seeds of folly sent down deep roots throughout the early and middle part of this decade.
Widespread concern that the country was headed for recession began in March, when high-profile voices such as billionaire Warren Buffet and former Federal Reserve Chairman Alan Greenspan declared as much. The collapse of one of the world's largest investment banks, Bear Stearns, that same month confirmed the dire pronouncements in the minds of many Americans.
Many others needed little convincing, given the state of their personal affairs. The national home foreclosure rate spiked to between 200,000 and 250,000 per month in the spring of this year, a 300 percent increase from the pre-crisis levels of 2005. Millions of homeowners watched with desperate horror as their adjustable-rate mortgages ticked upward even as their property values plummeted below their loan amounts. A glut of low-priced residential real estate flooded the market at a time when buyers were few.
Hundreds of thousands of such homes never sold. And lenders' past assurances to borrowers of the ready availability of refinancing began to smell like fraud. Gone were the no-doc loans and subprime options of yesteryear, lost in a sudden swell of sobered responsibility. Lenders now demanded proof of income, a solid credit score, and true home value appraisals. Borrowers stuck in interest-only ARMs and negative amortization products had no remedy but foreclosure.
And so began a vicious cycle. Abandoned properties and foreclosure signs began to dot neighborhoods nationwide, further driving down real estate values and increasing pressure on the homeowners who remained.
Local communities sprang to action in an effort to mitigate their pain. Financial crisis hotlines, free counseling services, and lender-borrower liaisons emanated from the nonprofit sector. State governments instituted programs to facilitate short sales and deed-in-lieu-of-foreclosure agreements. In July, President George W. Bush signed federal legislation aimed at helping states buy up and repair foreclosed properties and allowing the most helpless homeowners to escape subprime financing in favor of low-interest government-backed loans.
The federal foreclosure rescue bill brought new optimism that the nation might soon stop its financial bleeding and move toward recovery. Instead, the country's economic wound opened all the more.
Local and federal rescue efforts proved too little, too late. The nation's housing and credit imbalances necessitated severe market correction and the attendant pain of such chastening. What's more, a global spike in oil and food prices further strained the American wallet. And mortgage delinquency continued to rise.
By late summer, the government-sponsored enterprises of Fannie Mae and Freddie Mac faced a liquidity crisis. Overextended and in danger of insolvency, these massive lenders came under control of the Federal Housing Finance Agency on Sept. 7. The move marked the first major step toward adopting a philosophy of government bailout and intervention.
In the weeks that followed, financial firms folded like dead cards at a poker table. Lehman Brothers filed the largest bankruptcy in U.S. history. Merrill Lynch sold to Bank of America. And Washington Mutual fell to pieces in the nation's largest-ever bank failure. The market seized. Stocks tumbled.
The drama was enough to halt the presidential campaign, if only for a moment. Republican candidate John McCain abandoned the stump to join his Senate colleagues in Washington as they pondered the extent to which government might intervene. The Arizona senator incensed some strict free-market conservatives by declaring that "inaction is simply not an option." Democratic candidate Barack Obama likewise called the passage of a bailout package "a top priority."
Support from both major party candidates combined with the hair-raising realities of what further Wall Street collapses could mean for the country generated considerable political momentum. All signs pointed to speedy passage for what supporters dubbed a rescue plan. But to the shock of President Bush and investors, the House of Representatives rejected the first $700 billion bill. Republican detractors like Rep. John Culberson claimed the package represented a costly governmental overstep that would spare poorly run businesses from the consequences they deserved. "This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions," said the Texas congressman.
Democratic opponents of the bill charged that it fell short of offering enough foreclosure relief.
Whatever the reasons for the opposition vote, the bill's defeat sent a chilling message to Wall Street. The Dow Jones industrial average fell more than 700 points in the few hours after the vote. Though legislators made enough tweaks in the bill, including the addition of $100 billion in pork, to push it through the House five days later, the damage was done. The market did not recover.
Fiscal conservatives decried such a massive expenditure and expansion of government, laying blame for the financial crisis on the misguided housing-for-all mandate of years past. A smoking gun quote from Rep. Barney Frank five years earlier lent credence to such accusations: "These two entities-Fannie Mae and Freddie Mac-are not facing any kind of financial crisis," the Massachusetts congressman told The New York Times in September 2003. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
Of course, no amount of blame game could fix the problem at hand. Nor could the promise of a $700 billion market injection right the sinking economy. Investors grew only more squeamish over the fall, despite the federal dollars. The Dow Jones Industrial Average dipped to a six-year low of 7,552.29 on Nov. 20.
Increasingly desperate to halt the pain, the Federal Reserve unlocked $800 billion for mortgage, credit card, college, and auto lending, a move aimed at boosting the sagging availability of loans within the private sector. With a lame-duck Congress in session, legislators considered yet another bailout, this for the country's Big Three automakers, Ford, Chrysler, and General Motors.
But again, government action could not preclude the inevitable. This month, the National Bureau of Economic Research declared the country in recession and announced to all those living in denial for the past 12 months that, in fact, the recession had begun one year ago.