Generations came out in 1991, The Fourth Turning in 1997, and both included a prediction that the Crisis would start sometime after the turn of the century. And almost from the start of the year 2000, there were candidates for When Did It Begin:
- The Dot-com bubble bursts (April 2000)
- Bush v. Gore (November-December 2000)
- The 9/11 attacks and the invasion of Afghanistan (2001)
- The invasion of Iraq (2003)
- Hurricane Katrina (2005)
By the end of 2008, though, there wasn't much question anymore. If the Crisis hadn't started at one of those earlier points, it started in September 2008.
That was a busy month. The Republican and Democratic conventions had recently finished, and the Presidential Election was two months away. John McCain had chosen his running mate, Sarah Palin, in order to give the ticket credence with the more conservative among the GOP, and to gain some exposure in a news cycle that favored Democratic candidate Barack Obama. It did not help McCain when it was soon revealed that Palin's unmarried daughter was pregnant.
Which all paled when it was became clear that Lehman Brothers was in serious trouble. It announced layoffs, then announced a loss of nearly 4 billion dollars, then filed for bankruptcy on September 15. The Dow Jones Industrial Average dropped over 4%, and dropped more over the rest of the month.
It had been clear for over a year that the United States housing market was in a bubble, and that people were choosing foreclosure over continuing payments on overpriced mortgages. Lehman Brothers had invested in securities that depended on people continuing these payments. These securities were basically bonds that generated their interest payments from those people paying their mortgages. When they stopped paying, the securities became worth...well, that was part of the problem.
The value of the securities could be seen as either a) the present value of future payments or b) what they could be sold for on the market. As more mortgagees considered not paying, the value of future payments could not be effectively calculated - it was not possible to determine if a given security was worth the full expected value (because everyone was going to pay) or half of it (because half of the mortgagees were going default) or nothing at all. Unfortunately, it became clear that the second option was also not available, for much the same reason: Potential buyers wouldn't risk overpaying so potential sellers had to accept much less than previously - or acknowledge that there were effectively no buyers available. Making them worth less...if not worthless.
It had been clear for over a year that the United States housing market was in a bubble, and that people were choosing foreclosure over continuing payments on overpriced mortgages. Lehman Brothers had invested in securities that depended on people continuing these payments. These securities were basically bonds that generated their interest payments from those people paying their mortgages. When they stopped paying, the securities became worth...well, that was part of the problem.
The value of the securities could be seen as either a) the present value of future payments or b) what they could be sold for on the market. As more mortgagees considered not paying, the value of future payments could not be effectively calculated - it was not possible to determine if a given security was worth the full expected value (because everyone was going to pay) or half of it (because half of the mortgagees were going default) or nothing at all. Unfortunately, it became clear that the second option was also not available, for much the same reason: Potential buyers wouldn't risk overpaying so potential sellers had to accept much less than previously - or acknowledge that there were effectively no buyers available. Making them worth less...if not worthless.
Lehman Brothers was caught on it. They were bought out by Barclay's a week later. The loss of faith in the financial system caught hold. The options were limited and none off them were good. Businesses dependent merely on liquidity - department stores like Gottschalks, say, who depend on credit to buy merchandise before selling it - ran out of cash. Foreclosures continued. Planned housing developments were never completed, and completed developments were unable to be sold.
McCain's chances for victory - weak enough after the choice of Palin backfired - were destroyed. He was handily defeated by Obama just over a month later. The ripple effects of the liquidity crunch included a recession that continued through the following year and even today doesn't quite seem over.
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