Global Financial Crisis
The current recession encompasses the worst economic conditions seen in the United States since the Great Depression. According to the National Bureau of Economic Research this economic downturn began in December 2007, however some of its roots lay in the remedies for the previous official recession, which happened during 2001. The links in this guide take you through recent interest rate cuts, subprime mortgage issuance and asset-backed securities and how they led to the current state of the economy.
Expand All Guide SectionsThe Role of Subprime Mortgages in the Recession
During 2001, the U.S. economy saw a roughly eight-month long recession spurred on by the dot-com ... read more »
Collateralized Debt Obligations, or “Toxic Debt”
Some banks repackaged their mortgage debt and sold it to investment banks as financial instruments ... read more »
The Subprime Mortgage Crisis’s Effect on the Markets
Mortgage companies had already begun to go by the wayside, and margin calls were made on hedge funds with significant CDO holdings, but this did not immediately affect Wall Street. In July 2007, the Dow Jones Industrial Average closed above 14,000 for the first time. A few months later, the Dow closed at an all-time record high of 14,164.53 on Oct. 9. But the effects of the subprime crisis on the financial markets were felt on Wall Street in early 2007.
Top Sites for the Subprime Mortgage Crisis’s Effect on the Markets
CNN Money
has a concise timeline of major events in the subprime mortgage crisis, beginning with HSBC’s announcement in February 2007 that it expected to see substantial losses from defaults on subprime loans; the June 2007 asset dump of two Bear Stearns hedge funds largely exposed to toxic debt; and the U.S. government taking mortgage lenders Fannie Mae and Freddie Mac into federal conservatorship in September 2008.
The New York Times
covers the August 9, 2007, plunge in the Dow Jones. It dropped 387 points to close at 13,270.68, its biggest one-day decline since the previous February. Investors were growing nervous about the effects the subprime crisis could have on the credit markets. That morning, addressing whether the rising number of foreclosures and mortgage defaults could have a detrimental effect on the credit markets, President George W. Bush said at a news conference, “The fundamentals of our economy are strong” and there was no need for the federal government to provide money to the financial markets.
FindingDulcinea
has an August 2007 article examining developments in the subprime mortgage crisis to that point, including the Aug. 17 Federal Reserve interest rate cut in a bid to free up credit markets, the Fed’s moves to inject money into the banking system, and a March 2007 congressional hearing at which five top subprime lenders were invited to testify.
Barron’s
published an article in 2004 titled “No Margin of Safety,” which took a skeptical view of the rocketing stock prices for subprime lenders.
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