On September 15, 2008, Lehman Brothers collapsed. It was the final straw that broke the proverbial camel’s back… just weeks before the Government took over Fannie Mae and Freddie Mac. The repercussions turned a mild recession into a crisis.
The financial stress was caused by a number of factors, but none as damaging as the bursting of the real estate bubble. Home values fell and foreclosures hit all time highs. Financial institutions were in trouble. The Lehman Brothers bankruptcy exposed the depth of the financial problems. The very next day, the Government (taxpayers) bailed out AIG. Next, the Federal Reserve, Treasury Department, Congress and the President looked for ways to bail out the big money center banks and TARP (Troubled Asset Relief Program) was created.
On October 3, 2009, TARP celebrated its first birthday. There were no parties or fanfare. This milestone is best forgotten.
The initial plan was to buy “troubled assets” (mortgages) from the big money center banks. The goal was to free up capital and increase bank lending. In the process, the taxpayer would earn interest on those assets. Many believed the $700 billion “investment” could be repaid and even make a small profit. Despite these moves, credit all but disappeared. Business virtually stopped and the Dow fell. By the end of September 30, 2008, the Dow was at 8,600 and falling fast. Today, the Dow is hovering around 9,600 and has been climbing since March.
Within a month, the program morphed. Instead of buying “troubled” assets, TARP funds were used to buy preferred stocks of financial institutions. The hope was that TARP would improve bank capitalization and increase lending. Banks taking TARP funds were required to pay a 5% dividend and issue warrants to the Government. To date, $365 billion has been allocated with $444 billion left. So far, only $70 billion has been returned.
Earlier in 2009, TARP morphed once again. TARP funds which were designated for financial institutions were used to bailout Chrysler and General Motors. Despite the public outcry against further bailouts, it appears that TARP will be extended to October, 2010.
While the Treasury Department is handing out bailout money and taking over major corporations, don’t expect the same for us. We are on our own, and we know it. The savings rate has climbed from 0% to over 7%. While many economists expect the consumer will return to “the good old days” when we spent more than we earned, financed through credit cards and home loans. Don’t believe it.
This great recession has created a major paradigm shift. The new model most resembles the behavior that was so pervasive during the depression… careful spending, personal savings, and a greater reliance on ourselves. Extravagance is out and prudence is the standard. This is not just a passing fad. It is here to stay!
The national economy will have to recover without the normal post-recession consumer spending bump. This slower consumer spending will lead to slower growth. But what is good for the national economy is not always good for your personal financial recovery. Your financial well being comes from increased savings and investments, paying down or eliminating consumer debt, and greater prudence in shopping behavior.
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