A little over a year ago, this nation faced the worst economic downturn in over 70 years. The events that have unfolded over the past year rival and in some cases surpass those of the Great Depression. The poor economy left millions out of homes, jobs, and money saved. It has forced us to question our morals, values and what and who we are as a nation. The government bailouts to Wall Street and the Auto industry have caused anger and resentment among millions of Americans. Billions of dollars have been and still are being loaned out to companies to prevent them from faltering. Many Americans feel that this money was misused and are asking where their bailout is. Others question the legality and ask is this a capitalist or communist society? These questions will most likely never be answered, however the Government actions taken in 2008 were both essential to the health of our economy and surely without them we would have no economy.
The roots of the problem can be traced back into the previous decade when credit was easy to obtain and banks practically threw loans and mortgages at people who could not afford them. The government actions started in 2007. However the market was still climbing and the Dow Jones closed above 14,000 points on July 19, 2007. On August 7, 2007, less than a month after hitting its all time high, the Dow Jones begins its decent on the tails of slowing home sales and defaulting mortgages
By September 2007 the housing bubble has officially popped and homeowners are defaulting on their mortgages at a rate never seen before and banks struggle to cope with the losses.
Fast forward to March 2008, Bear Sterns fails and is bought by JPMorgan Chase with government backing. Now the floodgates have opened and bank after bank begins to fail. They have no money left and start to run to the government for help.
In September 2008, there is a federal take over of Fannie Mae and Freddie Mac. This company owned more than $12 trillion in mortgages, which means that one of every two homeowners had a mortgage with them. This causes the credit market to drop even more as easy mortgages are a way of the past. The government takeover stops the practice of subprime loans.
On September 14, 2008 Merill Lynch runs into the arms of Bank of America with government persuasion, effectively saving two of the biggest American banks. One day later the government allows Lehman Brothers to collapse. Over $700 billion of Americans’ money is lost, the majority of that is retirement funds. The government defends is decision citing lack of public funds, and to set an example of Lehman Brothers. There will be no bailout for investment banks.
AIG or American International group is a multifaceted insurance company but also has billions of American dollars invested on citizens’ behalves. On September 17th the government loans AIG $85 billion to avoid collapse. Without this money, AIG falters and all of its insurances go with it. AIG provides insurance for big loans between banks and other companies. This made American business possible in essence. Without it there would be no Ford cars or trucks on the roads and many products would never have been made. Companies like AIG make lending large amounts of money possible by providing backup for the lending. If a company like Ford were to default on a $30 billion loan, if AIG had backed it, the bank would receive compensation from AIG. Without AIG there is no corporate credit. But many Americans feel that this money was misused, but the original loans given did not carry stipulations and AIG has contract obligations to fulfill to its employees.
Following the AIG bailout, Americans raid the banks, withdrawing over $140 billion in a week from savings, checking and investment funds. The banks now face a liquidity problem. On September 29, 2008 the Dow Jones hits lucky sevens and falls 777 points. This is the largest one-day drop in history.
In October 2008, the government passes several bailout bills totaling trillions of dollars. Most of this is for sucking up toxic loans from banks and to instill hope back into Americans that the banks are safe. The government launches a study to see what banks need money and which ones are too far-gone and decides to loan money under specific terms to Bank of America, JPMorgan Chase and Citigroup as well as many others. Realizing that the problems are not just on Wall Street the Fed also allocates $1.3 trillion for loans to companies outside the financial sector.
The auto industry has taken the hardest hit besides the housing market. Ford, GM and Chrysler request government money to stay afloat. The request brings about the most controversy and people have had enough with loaning out taxpayer’s money to companies who made poor business decisions. However, without a bailout, these companies would fail and take with them hundreds of thousands of jobs. The government has their hands tied and is forced to lend $34 billion to GM and Chrysler and their respective credit companies. It is a choice made for the long term, as the last thing anyone wants to see is more jobs lost.
In all the government has lent out over $2 trillion to companies in the bailouts. That number will continue to rise for several years as the effects of the recession will be felt for years to come. The market has shown signs of stabilization, but unemployment remains high and credit is tight. The government is shifting its focus to providing jobs now, as that is the target of recovery. Many people feel that our lassiez-faire approach would have ultimately readjusted the economy and the recessions and depressions are a way to get rid of the weak. However the relationship between government and business must been seen as one of mother and child. Parents will go to the end of the earth and back for the well being of a child and will provide whatever that child needs to survive and be successful. When emotions are brought into the light, the line of virtue and vice is no longer clear. Yes, the economy would most likely up right itself eventually, but at what cost. It would be at the expensive of millions more homeless and jobless. Families would go hungry and our economy would have digressed several decades. The government bailouts expedited the recovery of the economy and without it; we surely would still be on the downward curve of the recession.
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