A Timeline of the Recession for Dummies

Early 2000s: Many lower-income Americans are buying homes.  This is made possible by low interest rates and easy credit.  Government-created lenders Fannie Mae and Freddie Mac issue subprime home mortgages to millions of homebuyers. Lenders begin to securitize mortgages, letting investors profit in the real estate market.

2003-2006: Banks buy up mortgages and sell them in the form of a mortgage-backed security to investors. Investors all around the world invest in these securities, and as a result Americans buy homes in record numbers thinking that home prices will continue to rise. This creates a real estate bubble.

2006-2007: The real estate bubble in the United States bursts as demand outstrips supply. Home prices begin to decline rapidly, and continue to decline today.  For many Americans, homeloans taken out to buy houses are now worth more than the actual house itself.  Millions of home owners default on their loans and foreclosure rates rise.

March 2008: Bear Stearns is the first major investment bank to fold because of its involvement in the real estate market.  JP Morgan buys Bear Stearns for $10 a share, and other failing banks start merging.  Major investment banks refuse to lend out money, and the credit markets freeze up.

July 2008: President Bush signs Housing and Economic Recovery Act, giving $300 billion to subprime borrowers.

Sept. 2008: The government takes over the failing Freddie Mae and Freddie Mac. Bank of America buys Merrill Lynch, a major investment bank, for $50 billion.  Another Wall Street bank, Lehman Brothers, declares bankruptcy and fails to find a buyer; this creates a domino effect for other banks who lent money to Lehman Brothers.  AIG, a giant insurance company, faces financial trouble due to its heavy investments in the derivatives market, specifically credit default swaps; they go bankrupt, failing to pay back their collaterized debt obligations to investors.  The government issues an $85 billion bailout package to help AIG pay back its customers.

Oct. 2008: After a failed attempt to bailout Wall Street banks the previous month, Congress passes a $700 billion bank rescue package, the Toxic Asset Relief Program (TARP).  The Federal Reserve provides loans to banks in an attempt to free up the credit markets.

Jan. 2009: With strong GOP opposition, Congress passes the $819 billion stimulus package designed to revitalize the economy.  Jobless claims reach an all-time high.

March 2009: Dow falls below 7,000 points, down from its all time high of 14,000 points in Oct. 2007. Unemployment reaches a 25 year all time high of 9.4%.

May 2009: Credit Card Reform Bill becomes law.  Requires credit card companies to give consumers more notice before cancelling accounts or raising interest rates.

July 2009: Federal Reserve Board votes to increase government oversight of real estate market. Changes require a safe and transparent process for people who need to lock in a loan to buy a house.

Oct. 2009: Unemployment numbers reach 10.1%, its highest level since 1983. Those who are still employed must cope with shorter working hours.

Jan. 2010: President Obama proposes tighter rules on the ways commercial banks invest their money.

July 2010: President Obama signs financial regulatory reform bill. Law imposes more restrictions on banks, and regulates derivatives trading.

Want to impress your economics teacher on Monday?  Mirador is here to help.  Here are some key terms for this important issue:

  • Subprime lending: giving loans to people who have bad credit, or trouble maintaining payments; these loans have higher interest rates and a higher risk for the lender
  • Security: a general term representing financial value in the form of several different types of investments
  • Securitization: pooling different types of debt and selling that debt in the form of a security to an investor
  • Collateralized debt obligation (CDO): different types of debt (car loans, home mortgages, and credit card debt) that have been securitized to sell to an investor; the interest paid on the collateralized debt is paid back to the investor
  • Mortgage-backed security: a type of debt obligation that has claims on cash pools that pay for a mortgage
  • Derivative: a bet that banks or investors make on the future value of a financial asset (assets have financial value, but derivatives themselves have no tangible value and were unregulated by the government until recently)
  • Credit default swap: a type of unregulated insurance an investor buys from an investment bank to protect his or her investment; banks are not required to hold any capital to back up the value of the protected security
  • Foreclosure: when a bank reposesses a house after the homeowner has defaulted on the mortgage and tries to sell it again; however, in a depressed housing market the house is typically very difficult to sell