The stock market crash of 2008 was the biggest market that happened in the history of the world economy. A domino effect of the crash was seen during that time and ripped off all the savings of the people in America.
The fall of the Dow Jones to 777.8 in single trading and rejection of bank bail-out bill by Congress was the cause of the crash. This big crash did not happen in one day, and some signs were visible from the time before the crash. India, too was worst struck in the market crash. And the World Bank came on the brink of collapse.
The crash led t the following problem in 2008
- Huge job loss
- Mortgage defaults
- Downfall of investment firms
- Many Automakers went Bankrupt
Timeline of 2008 Stock Market Crash
During the subprime mortgage crisis, the Dow opened at 12,459.45 points. This crisis happened when banks sold too many loans to meet the demand for mortgage-based securities that were sold through the secondary market. The GDP of America rose by 0.5% in the third quarter of the year. The Dow ended at 13,264 poits.
The country’s GDP growth was only 0.6% in the last quarter of the year, and there were already 15,000 job losses since 2004. Dow had fallen and became stable between 12,000 to 13,000, till March 2008. In March 2008, the Reserve bank became active and started working towards protecting the banks and financial firms like Bear Stearns that had started falling. The Dow dropped to 11,650.44, but it soon rose to 13,000 in May.
Fannie Mae and Freddie Mac, two government-sponsored agencies, were adversely affected and demanded a market bail-out. To protect these two agencies, the Treasury Department paid $25 billion of their loan and bought the shares of their stocks. On the other hand, the Federal Authority offered financial help of $300 billion. During this time, Dow fell to 10,924.54 but got stable at 11,000 points.
The news of Lehman Brothers broke out, and it hit the market, and the day closed with the fall of Dow by 504.48 points. During this time, the Federal Reserve of America announced another bail-out and AIG by making an $85 Billion loan for 79.9% equity.
With the bankruptcy of Lehman Brothers, a loss of $196 billion was incurred, and it caused massive panic among businesses. Banks increased the interest rates loans to make lending difficult. Dow fell by 446.92 points on 17 September.
On 19 September, FED made Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility offer loans to banks to buy Commercial Paper from money market fund. The Dow ended on 11,388.44 points on that day.
Then on September 20, the bank bail-out bill was sent to Congress by Federal Reserve Chair and Secretary Paulson. That day the Dow fell to 777.68 points, and it created panic in the global market.
Congress passed the bail-out bill, and the Dow Dropped 800 points and closed at 10,000 on October 6, 2008.
Fed lowered the Fed funds to 1%, and Libor Bank rose the lending to 3.46%. The economy further contracted, and the USA went into recession.
The country lost 240,000 jobs in October, and major automakers asked for a bail-out from Federal Reserve.
The dow ended at 34% lower than at the beginning at 877.39 points.
The Dow rose to 8776.39 in the first month of the year, and by July, the Dow reached 9093.24 points. This almost ended the stock market crash, but the damage of the crash was yet to be rectified.
Stock Market Crash of 2008 in Graphs
The graph below the year-long list of NYSE charts of the financial year 2008-09. The graph showed S&P 500 peak from in October to its least value in March 2009.
Nasdaq100 also reached to least value in November 2008.
Causes of The Stock Market Crash
- The subprime mortgage crisis was the most important reason behind the crisis.
- The Subprime crisis led the bank to not tolled each other in fear of being stuck wit subprime mortgages as collateral. Fed decreased the interest rates to restore the confidence in banks. Fed announced to provide liquidity to banks and hedge funds but that did not work out and many esteemed institutions became bankrupt.
- The housing bust paved the way of stock market to take a deep dive and it ultimately lost more than half of its value. This caused a quarter of American families to lose 75% of their wealth and more than half of the families lost 25% of their wealth.
Crash Aftermath of The Stock Market Crash
- Unemployment reached its peak at 10%. Around 8.7 million jobs were lost during this time. This also led to a sharp decline of the retirement savings.
- The biggest Automakers of the country went to a verge of bankruptcy. Major names in the list are General Motors, Chrysler LLC, Ford Motor.
- With loss of jobs in the country many people lost their houses too.
- Dow Jones hit its lowest value in the first quarter of 2009 and further accelerated the economic downfall.