Summary 2008 Financial Crisis

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The financial crisis began in early 2006 when the subprime mortgage market in the U.S. began to display an increasing rate of mortgage defaults. These defaults lead, in late 2006, to a decline in US housing prices after nearly a decade of exceptionally high growth. Many Americans watched as their primary source of wealth become increasingly devalued. By late 2007, the prime mortgage markets were showing higher than normal default rates as well.

Collateralized Mortgage Obligations (CMOs), a type of collateralized debt obligations (CDOs), allowed these problems to spread from the mortgage market to other sectors of the economy, having especially widespread effects on financial markets as a whole. CMOs were mortgage-backed securities
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These liquidity problems turned to insolvency in September of 2008, when private lending froze completely in a number of important credit markets, such as commercial paper. As a result, non-financial businesses were unable to get access to the financing they required to function normally, leading to problems in the real economy.

The real economy began to exhibit problems related to the financial crisis as early as March 2006, when investment expenditure on residential structures began to decline. In early 2008, this decline spread to investment in business equipment and consumer spending on durable goods. It wasn’t until the summer of 2008 that consumer spending broadly and GDP began falling, signs of a recession. (In December 2008, the National Bureau of Economic Research, official arbiter of business cycles dated the formal beginning of the recession as December 2007.) While the public had been concerned about recession for much of the year, it wasn’t until the fall that the economy began to decline at more than a 6% annual rate. Congress responded by passing the TARP plan to assist failing financial institutions. This plan was meant to decrease the severity of the recession by treating its cause: the financial crisis.

The financial crisis and recession in the U.S.
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