On Tuesday, September 16, 2008, the $62.6 billion Reserve Primary Fund "broke the buck."That meant the fund managers couldn't maintain its share price at the $1 value.Money market fundsused that value as a benchmark.
Investors were panicking after Monday's bankruptcy of Lehman Brothers. They were taking out their money too fast. Theyworried that the Fund would go bankrupt due to its investments in Lehman Brothers. That bank had invested a large part of their holdings in mortgage-backed securities and other derivatives. Those investments were losing value because housing prices had started falling in 2006. That meant mortgage-holders couldn't sell their homes for what they paid for them. Banks were foreclosing. As a result, Lehman declared bankruptcy. That panic created an unprecedented run on a supposedly safe money market.
On Wednesday,the United States came close to aneconomic collapse. On September 17, 2008, investors withdrew a record $144.5 billion from the money marketaccounts. By Sept. 19, when the U.S. Treasury took action, they had taken out $172 billion.
Money market accounts had always beenthe safest of investments. That's where companies,sovereign wealth funds,and even retirees keep their cash. During a typical week, only about $7 billion is withdrawn.
Worried investors were moving the funds toU.S. Treasurys. That forcedTreasury yieldsto drop below zero. In other words, investors were so panicked that they no longer cared if they gotanyreturn on their investment. They just didn't want to losecapital.
Money market funds are also where businesses keep their cash overnight. Theyuse it for day-to-day operations.If those funds run dry, your grocery store shelves go empty within weeks. The grocery firms would run out of cash to pay truckers or other distributors.
Here's how theWall Street Journal described that September 17:
" Huddled in his office Wednesday with top advisers,Treasury SecretaryHenry Paulsonwatched his financial-data terminal with alarm. One market after another began to go haywire. Investors were fleeing money-marketmutual funds, long considered ultra-safe. The market froze for the short-term loans that banks rely on to finance their day-to-day business. Without such mechanisms, the economy would grind to a halt. Companies would be unable to fund their daily operations. Soon, consumers would panic."
Banks had also been hoarding cash. They were tooanxious to lend to each other for fear of taking on bad debt as collateral. Normally, financial institutions have about $2 billion on hand at any given time. By Thursday, they had acquired an unprecedented $190 billion. They wanted to have the cash on handin case of mass redemptions. America was on the brink of a total run on the banks. Unlike the Great Depression, it wasn'tby worried depositors. This time, it wasby corporate investors.
"Without these funds' participation, the $1.7 trillion commercial-paper market, which finances automakers' lending arms or banks credit-card units, faced higher costs.Without commercial paper, 'factories would have to shut down, people would lose their jobs, and there would be an effect on the real economy,' says Paul Schott Stevens, president of the Investment Company Institute mutual-fund trade group."
SecretaryPaulsonconferred with Federal Reserve ChairmanBen Bernanke. Heagreed that the problem was beyond the scope ofmonetary policy. The federal government was the only entity large enough to take effective action. The two decided to ask Congress to appropriate $700 billion to bail out banks in danger of bankruptcy. Why such a large sum? It had to be enough to stop the panic and restore confidence.
That's how the money market run triggered thebank bailout bill. Congress balked at approving the bail out of investmentbankswho purchasedmortgage-backed securities. Some didn't believe financial institutions were nowin danger of defaulting. Others wanted to let the free market take its course. Still others were concerned about spending taxpayer dollars to make up for those banks’ poor judgments.
The money market run showed just how close the global economy was to a catastrophic meltdown.Congress asked Paulson what would happen if the bailout weren't approved. He quietly replied, "Heaven help us all."
FAQs
The 2007-09 economic crisis was deep and protracted enough to become known as "the Great Recession" and was followed by what was, by some measures, a long but unusually slow recovery.
When was the last economic crash in the US? ›
It is considered the most significant downturn since the Great Depression in the 1930s. The term “Great Recession” applies to both the U.S. recession, officially lasting from December 2007 to June 2009, and the ensuing global recession in 2009.
Why did the US economy collapse? ›
The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market.
What was the worst economic downturn in US history? ›
The vast majority of economic historians believe the Great Recession was the second worst contraction in US history, after the Great Depression.
Is the US facing economic collapse? ›
Though the economy occasionally sputtered in 2022, it has certainly been resilient — and now, in the second quarter of 2024, the U.S. is still not currently in a recession, according to a traditional definition.
Is the economic collapse imminent? ›
While the labor market has shown little signs of a coming recession, the impending slowdown will not be as innocuous. Unemployment will rise as 2024 progresses, continuing into 2025. Job growth will turn negative, but not as sharply as during the 2008-09 and 2020 recessions.
What happens if the US economy collapses? ›
An absent economy translates into less spending, not just for people but for the government. Infrastructure projects will likely remain stagnant. Depending on how long it takes for the economy to bounce back and the effects of the collapse, funds on a state and federal level will be incredibly limited.
Are we in a Great Depression right now? ›
“The American economy is not in a silent depression. It's not even in a depression at all,” House said. “When we came into 2023, many economists thought we might slide into a recession over the course of the year, but growth in goods and services and in trade have all remained far stronger than we anticipated.”
Is the US in recession in 2024? ›
Fact check: US is definitively not in a recession
In the first quarter of 2024, GDP grew by 1.6%. Although this represents a deceleration from the 3.3% growth seen in the fourth quarter of 2023. Plus, US GDP growth has been outpacing that of other developed nations.
How to survive if the US economy collapses? ›
The Bottom Line
Build up your emergency fund, pay off your high-interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.
ITR Economics is projecting that the next Great Depression will begin in 2030 and last well into 2036. However, we do not expect a simple, completely downward trend throughout those years. There will be signs of slight growth that pop up during this period.
Will the economy get better in 2024? ›
U.S. real GDP growth on an annual average basis will be 2.3 percent in 2024, 1.5 percent in 2025, and 2.2 percent in 2026. National job growth will weaken sharply to only 35,000 monthly gains in the second half of 2024, rebounding to 115,000 job gains by late 2025 as aggressive Fed rate cuts spur investment spending.
Who has the worst economy in the USA? ›
- (tie) Iowa. ...
- New Hampshire. ...
- Louisiana. ...
- North Dakota. ...
- Mississippi. ...
- (tie) Rhode Island. ...
- (tie) West Virginia. ...
- Alaska. The Last Frontier was dead last in economic performance last year, with its economy shrinking by 2.4%.
Everybody involved with the 2007–2008 financial crisis is partly to blame for the Great Recession: the government, for a lack of oversight; consumers, for reckless borrowing; and financial institutions, for predatory lending and unscrupulous bundling and selling of mortgage-‐backed securities.
How long did it take to recover from the 2008 recession? ›
The recession lasted 18 months and was officially over by June 2009. However, the effects on the overall economy were felt for much longer. The unemployment rate did not return to pre-recession levels until 2014, and it took until 2016 for median household incomes to recover.
Did the US economy collapse in 2008? ›
The Great Recession of 2008 to 2009 was the worst economic downturn in the U.S. since the Great Depression. Domestic product declined 4.3%, the unemployment rate doubled to more than 10%, home prices fell roughly 30% and at its worst point, the S&P 500 was down 57% from its highs.
What caused the 2008 crash? ›
What Caused the Financial Crisis of 2008? The growth of predatory mortgage lending, unregulated markets, a massive amount of consumer debt, the creation of "toxic" assets, the collapse of home prices, and more contributed to the financial crisis of 2008.
What caused the 2008 financial crisis? ›
The catalysts for the GFC were falling US house prices and a rising number of borrowers unable to repay their loans. House prices in the United States peaked around mid 2006, coinciding with a rapidly rising supply of newly built houses in some areas.
What happened to the US economy in 2009? ›
Real gross domestic product (GDP) fell 4.3 percent from its peak in 2007Q4 to its trough in 2009Q2, the largest decline in the postwar era (based on data as of October 2013). The unemployment rate, which was 5 percent in December 2007, rose to 9.5 percent in June 2009, and peaked at 10 percent in October 2009.
