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The Gateway Center at Bronx Terminal Market, in the West Bronx, is a shopping center that encompasses less than one million square feet of retail space, built on a 17 acres (7 ha) site that formerly held the Bronx Terminal Market, a wholesale fruit and vegetable market as well as the former Bronx House of Detention, south of Yankee Stadium. The $500 million shopping center, which was completed in 2009, saw the construction of new buildings and two smaller buildings, one new and the other a renovation of an existing building that was part of the original market. The two main buildings are linked by a six-level garage for 2,600 cars. The center has earned itself a LEED "Silver" designation in its design.
The Bronx street grid is irregular. Like the northernmost part of upper Manhattan, the West Bronx's hilly terrain leaves a relatively free-style street grid. Much of the West Bronx's street numbering carries over from upper Manhattan, but does not match it exactly; East 132nd Street is the lowest numbered street in the Bronx. This dates from the mid-19th century when the southwestern area of Westchester County west of the Bronx River, was incorporated into New York City and known as the Northside.
According to the 2010 Census, 53.5% of Bronx's population was of Hispanic, Latino, or Spanish origin (they may be of any race); 30.1% non-Hispanic Black or African American, 10.9% of the population was non-Hispanic White, 3.4% non-Hispanic Asian, 0.6% from some other race (non-Hispanic) and 1.2% of two or more races (non-Hispanic). The U.S. Census considers the Bronx to be the most diverse area in the country. There is an 89.7 percent chance that any two residents, chosen at random, would be of different race or ethnicity.
As of 2010, 46.29% (584,463) of Bronx residents aged five and older spoke Spanish at home, while 44.02% (555,767) spoke English, 2.48% (31,361) African languages, 0.91% (11,455) French, 0.90% (11,355) Italian, 0.87% (10,946) various Indic languages, 0.70% (8,836) other Indo-European languages, and Chinese was spoken at home by 0.50% (6,610) of the population over the age of five. In total, 55.98% (706,783) of the Bronx's population age five and older spoke a language at home other than English. A Garifuna-speaking community from Honduras and Guatemala also makes the Bronx its home.
According to the 2009 American Community Survey, White Americans of both Hispanic and non-Hispanic origin represented over one-fifth (22.9%) of the Bronx's population. However, non-Hispanic whites formed under one-eighth (12.1%) of the population, down from 34.4% in 1980. Out of all five boroughs, the Bronx has the lowest number and percentage of white residents. 320,640 whites called the Bronx home, of which 168,570 were non-Hispanic whites. The majority of the non-Hispanic European American population is of Italian and Irish descent. People of Italian descent numbered over 55,000 individuals and made up 3.9% of the population. People of Irish descent numbered over 43,500 individuals and made up 3.1% of the population. German Americans and Polish Americans made up 1.4% and 0.8% of the population respectively.
At the 2009 American Community Survey, Black Americans made the second largest group in the Bronx after Hispanics and Latinos. Blacks of both Hispanic and non-Hispanic origin represented over one-third (35.4%) of the Bronx's population. Blacks of non-Hispanic origin made up 30.8% of the population. Over 495,200 blacks resided in the borough, of which 430,600 were non-Hispanic blacks. Over 61,000 people identified themselves as "Sub-Saharan African" in the survey, making up 4.4% of the population.
In 2009, Hispanic and Latino Americans represented 52.0% of the Bronx's population. Puerto Ricans represented 23.2% of the borough's population. Over 72,500 Mexicans lived in the Bronx, and they formed 5.2% of the population. Cubans numbered over 9,640 members and formed 0.7% of the population. In addition, over 319,000 people were of various Hispanic and Latino groups, such as Dominican, Salvadoran, and so on. These groups collectively represented 22.9% of the population. At the 2010 Census, 53.5% of Bronx's population was of Hispanic, Latino, or Spanish origin (they may be of any race). Asian Americans are a small but sizable minority in the borough. Roughly 49,600 Asians make up 3.6% of the population. Roughly 13,600 Indians call the Bronx home, along with 9,800 Chinese, 6,540 Filipinos, 2,260 Vietnamese, 2,010 Koreans, and 1,100 Japanese.
Multiracial Americans are also a sizable minority in the Bronx. People of multiracial heritage number over 41,800 individuals and represent 3.0% of the population. People of mixed Caucasian and African American heritage number over 6,850 members and form 0.5% of the population. People of mixed Caucasian and Native American heritage number over 2,450 members and form 0.2% of the population. People of mixed Caucasian and Asian heritage number over 880 members and form 0.1% of the population. People of mixed African American and Native American heritage number over 1,220 members and form 0.1% of the population.
The office of Borough President was created in the consolidation of 1898 to balance centralization with local authority. Each borough president had a powerful administrative role derived from having a vote on the New York City Board of Estimate, which was responsible for creating and approving the city's budget and proposals for land use. In 1989 the Supreme Court of the United States declared the Board of Estimate unconstitutional on the grounds that Brooklyn, the most populous borough, had no greater effective representation on the Board than Staten Island, the least populous borough, a violation of the Fourteenth Amendment's Equal Protection Clause pursuant to the high court's 1964 "one man, one vote" decision.
Until March 1, 2009, the Borough President of the Bronx was Adolfo Carrión Jr., elected as a Democrat in 2001 and 2005 before retiring early to direct the White House Office of Urban Affairs Policy. His successor, Democratic New York State Assembly member Rubén Díaz, Jr., who won a special election on April 21, 2009 by a vote of 86.3% (29,420) on the "Bronx Unity" line to 13.3% (4,646) for the Republican district leader Anthony Ribustello on the "People First" line, became Borough President on May 1.
In the Presidential primary elections of February 5, 2008, Sen. Clinton won 61.2% of the Bronx's 148,636 Democratic votes against 37.8% for Barack Obama and 1.0% for the other four candidates combined (John Edwards, Dennis Kucinich, Bill Richardson and Joe Biden). On the same day, John McCain won 54.4% of the borough's 5,643 Republican votes, Mitt Romney 20.8%, Mike Huckabee 8.2%, Ron Paul 7.4%, Rudy Giuliani 5.6%, and the other candidates (Fred Thompson, Duncan Hunter and Alan Keyes) 3.6% between them.
Since then, the Bronx has always supported the Democratic Party's nominee for President, starting with a vote of 2-1 for the unsuccessful Al Smith in 1928, followed by four 2-1 votes for the successful Franklin D. Roosevelt. (Both had been Governors of New York, but Republican former Gov. Thomas E. Dewey won only 28% of the Bronx's vote in 1948 against 55% for Pres. Harry Truman, the winning Democrat, and 17% for Henry A. Wallace of the Progressives. It was only 32 years earlier, by contrast, that another Republican former Governor who narrowly lost the Presidency, Charles Evans Hughes, had won 42.6% of the Bronx's 1916 vote against Democratic President Woodrow Wilson's 49.8% and Socialist candidate Allan Benson's 7.3%.)
The Bronx has often shown striking differences from other boroughs in elections for Mayor. The only Republican to carry the Bronx since 1914 was Fiorello La Guardia in 1933, 1937 and 1941 (and in the latter two elections, only because his 30-32% vote on the American Labor Party line was added to 22-23% as a Republican). The Bronx was thus the only borough not carried by the successful Republican re-election campaigns of Mayors Rudolph Giuliani in 1997 and Michael Bloomberg in 2005. The anti-war Socialist campaign of Morris Hillquit in the 1917 mayoral election won over 31% of the Bronx's vote, putting him second and well ahead of the 20% won by the incumbent pro-war Fusion Mayor John P. Mitchel, who came in second (ahead of Hillquit) everywhere else and outpolled Hillquit city-wide by 23.2% to 21.7%.
Education in the Bronx is provided by a large number of public and private institutions, many of which draw students who live beyond the Bronx. The New York City Department of Education manages public noncharter schools in the borough. In 2000, public schools enrolled nearly 280,000 of the Bronx's residents over 3 years old (out of 333,100 enrolled in all pre-college schools). There are also several public charter schools. Private schools range from élite independent schools to religiously affiliated schools run by the Roman Catholic Archdiocese of New York and Jewish organizations.
Educational attainment: In 2000, according to the U.S. Census, out of the nearly 800,000 people in the Bronx who were then at least 25 years old, 62.3% had graduated from high school and 14.6% held a bachelor's or higher college degree. These percentages were lower than those for New York's other boroughs, which ranged from 68.8% (Brooklyn) to 82.6% (Staten Island) for high school graduates over 24, and from 21.8% (Brooklyn) to 49.4% (Manhattan) for college graduates. (The respective state and national percentages were [NY] 79.1% & 27.4% and [US] 80.4% & 24.4%.)
Many public high schools are located in the borough including the elite Bronx High School of Science, Celia Cruz Bronx High School of Music, DeWitt Clinton High School, High School for Violin and Dance, Bronx Leadership Academy 2, Bronx International High School, the School for Excellence, the Morris Academy for Collaborative Study, Wings Academy for young adults, The Bronx School for Law, Government and Justice, Validus Preparatory Academy, The Eagle Academy For Young Men, Bronx Expeditionary Learning High School, Bronx Academy of Letters, Herbert H. Lehman High School and High School of American Studies. The Bronx is also home to three of New York City's most prestigious private, secular schools: Fieldston, Horace Mann, and Riverdale Country School.
In the 1990s, New York City began closing the large, public high schools in the Bronx and replacing them with small high schools. Among the reasons cited for the changes were poor graduation rates and concerns about safety. Schools that have been closed or reduced in size include John F. Kennedy, James Monroe, Taft, Theodore Roosevelt, Adlai Stevenson, Evander Childs, Christopher Columbus, Morris, Walton, and South Bronx High Schools. More recently the City has started phasing out large middle schools, also replacing them with smaller schools.
The Bronx's evolution from a hot bed of Latin jazz to an incubator of hip hop was the subject of an award-winning documentary, produced by City Lore and broadcast on PBS in 2006, "From Mambo to Hip Hop: A South Bronx Tale". Hip Hop first emerged in the South Bronx in the early 1970s. The New York Times has identified 1520 Sedgwick Avenue "an otherwise unremarkable high-rise just north of the Cross Bronx Expressway and hard along the Major Deegan Expressway" as a starting point, where DJ Kool Herc presided over parties in the community room.
Beginning with the advent of beat match DJing, in which Bronx DJs (Disc Jockeys) including Grandmaster Flash, Afrika Bambaataa and DJ Kool Herc extended the breaks of funk records, a major new musical genre emerged that sought to isolate the percussion breaks of hit funk, disco and soul songs. As hip hop's popularity grew, performers began speaking ("rapping") in sync with the beats, and became known as MCs or emcees. The Herculoids, made up of Herc, Coke La Rock, and DJ Clark Kent, were the earliest to gain major fame. The Bronx is referred to in hip-hop slang as "The Boogie Down Bronx", or just "The Boogie Down". This was hip-hop pioneer KRS-One's inspiration for his thought provoking group BDP, or Boogie Down Productions, which included DJ Scott La Rock. Newer hip hop artists from the Bronx include Big Pun, Lord Toriq and Peter Gunz, Camp Lo, Swizz Beatz, Drag-On, Fat Joe, Terror Squad and Corey Gunz.
The Bronx is the home of the New York Yankees of Major League Baseball. The original Yankee Stadium opened in 1923 on 161st Street and River Avenue, a year that saw the Yankees bring home their first of 27 World Series Championships. With the famous facade, the short right field porch and Monument Park, Yankee Stadium has been home to many of baseball's greatest players including Babe Ruth, Lou Gehrig, Joe DiMaggio, Whitey Ford, Yogi Berra, Mickey Mantle, Reggie Jackson, Derek Jeter and Mariano Rivera.
The Bronx is home to several Off-Off-Broadway theaters, many staging new works by immigrant playwrights from Latin America and Africa. The Pregones Theater, which produces Latin American work, opened a new 130-seat theater in 2005 on Walton Avenue in the South Bronx. Some artists from elsewhere in New York City have begun to converge on the area, and housing prices have nearly quadrupled in the area since 2002. However rising prices directly correlate to a housing shortage across the city and the entire metro area.
The Bronx Museum of the Arts, founded in 1971, exhibits 20th century and contemporary art through its central museum space and 11,000 square feet (1,000 m2) of galleries. Many of its exhibitions are on themes of special interest to the Bronx. Its permanent collection features more than 800 works of art, primarily by artists from Africa, Asia and Latin America, including paintings, photographs, prints, drawings, and mixed media. The museum was temporarily closed in 2006 while it underwent a major expansion designed by the architectural firm Arquitectonica.
The Bronx has also become home to a peculiar poetic tribute, in the form of the Heinrich Heine Memorial, better known as the Lorelei Fountain from one of Heine's best-known works (1838). After Heine's German birthplace of Düsseldorf had rejected, allegedly for anti-Semitic motives, a centennial monument to the radical German-Jewish poet (1797–1856), his incensed German-American admirers, including Carl Schurz, started a movement to place one instead in Midtown Manhattan, at Fifth Avenue and 59th Street. However, this intention was thwarted by a combination of ethnic antagonism, aesthetic controversy and political struggles over the institutional control of public art.
In 1899, the memorial, by the Berlin sculptor Ernst Gustav Herter (1846–1917), finally came to rest, although subject to repeated vandalism, in the Bronx, at 164th Street and the Grand Concourse, or Joyce Kilmer Park near today's Yankee Stadium. (In 1999, it was moved to 161st Street and the Concourse.) In 2007, Christopher Gray of The New York Times described it as "a writhing composition in white Tyrolean marble depicting Lorelei, the mythical German figure, surrounded by mermaids, dolphins and seashells."
The peninsular borough's maritime heritage is acknowledged in several ways.The City Island Historical Society and Nautical Museum occupies a former public school designed by the New York City school system's turn-of-the-last-century master architect C. B. J. Snyder. The state's Maritime College in Fort Schuyler (on the southeastern shore) houses the Maritime Industry Museum. In addition, the Harlem River is reemerging as "Scullers' Row" due in large part to the efforts of the Bronx River Restoration Project, a joint public-private endeavor of the city's parks department. Canoeing and kayaking on the borough's namesake river have been promoted by the Bronx River Alliance. The river is also straddled by the New York Botanical Gardens, its neighbor, the Bronx Zoo, and a little further south, on the west shore, Bronx River Art Center.
The Bronx has several local newspapers, including The Bronx News, Parkchester News, City News, The Riverdale Press, Riverdale Review, The Bronx Times Reporter, Inner City Press (which now has more of a focus on national issues) and Co-Op City Times. Four non-profit news outlets, Norwood News, Mount Hope Monitor, Mott Haven Herald and The Hunts Point Express serve the borough's poorer communities. The editor and co-publisher of The Riverdale Press, Bernard Stein, won the Pulitzer Prize for Editorial Writing for his editorials about Bronx and New York City issues in 1998. (Stein graduated from the Bronx High School of Science in 1959.)
The City of New York has an official television station run by the NYC Media Group and broadcasting from Bronx Community College, and Cablevision operates News 12 The Bronx, both of which feature programming based in the Bronx. Co-op City was the first area in the Bronx, and the first in New York beyond Manhattan, to have its own cable television provider. The local public-access television station BronxNet originates from Herbert H. Lehman College, the borough's only four year CUNY school, and provides government-access television (GATV) public affairs programming in addition to programming produced by Bronx residents.
Mid-20th century movies set in the Bronx portrayed densely settled, working-class, urban culture. Hollywood films such as From This Day Forward (1946), set in Highbridge, occasionally delved into Bronx life. Paddy Chayefsky's Academy Award-winning Marty was the most notable examination of working class Bronx life was also explored by Chayefsky in his 1956 film The Catered Affair, and in the 1993 Robert De Niro/Chazz Palminteri film, A Bronx Tale, Spike Lee's 1999 movie Summer of Sam, centered in an Italian-American Bronx community, 1994's I Like It Like That that takes place in the predominantly Puerto Rican neighborhood of the South Bronx, and Doughboys, the story of two Italian-American brothers in danger of losing their bakery thanks to one brother's gambling debts.
Starting in the 1970s, the Bronx often symbolized violence, decay, and urban ruin. The wave of arson in the South Bronx in the 1960s and 1970s inspired the observation that "The Bronx is burning": in 1974 it was the title of both a New York Times editorial and a BBC documentary film. The line entered the pop-consciousness with Game Two of the 1977 World Series, when a fire broke out near Yankee Stadium as the team was playing the Los Angeles Dodgers. Numerous fires had previously broken out in the Bronx prior to this fire. As the fire was captured on live television, announcer Howard Cosell is wrongly remembered to have said something like, "There it is, ladies and gentlemen: the Bronx is burning". Historians of New York City frequently point to Cosell's remark as an acknowledgement of both the city and the borough's decline. A new feature-length documentary film by Edwin Pagan called Bronx Burning is in production in 2006, chronicling what led up to the numerous arson-for-insurance fraud fires of the 1970s in the borough.
Bronx gang life was depicted in the 1974 novel The Wanderers by Bronx native Richard Price and the 1979 movie of the same name. They are set in the heart of the Bronx, showing apartment life and the then-landmark Krums ice cream parlor. In the 1979 film The Warriors, the eponymous gang go to a meeting in Van Cortlandt Park in the Bronx, and have to fight their way out of the borough and get back to Coney Island in Brooklyn. A Bronx Tale (1993) depicts gang activities in the Belmont "Little Italy" section of the Bronx. The 2005 video game adaptation features levels called Pelham, Tremont, and "Gunhill" (a play off the name Gun Hill Road). This theme lends itself to the title of The Bronx Is Burning, an eight-part ESPN TV mini-series (2007) about the New York Yankees' drive to winning baseball's 1977 World Series. The TV series emphasizes the boisterous nature of the team, led by manager Billy Martin, catcher Thurman Munson and outfielder Reggie Jackson, as well as the malaise of the Bronx and New York City in general during that time, such as the blackout, the city's serious financial woes and near bankruptcy, the arson for insurance payments, and the election of Ed Koch as mayor.
The 1981 film Fort Apache, The Bronx is another film that used the Bronx's gritty image for its storyline. The movie's title is from the nickname for the 41st Police Precinct in the South Bronx which was nicknamed "Fort Apache". Also from 1981 is the horror film Wolfen making use of the rubble of the Bronx as a home for werewolf type creatures. Knights of the South Bronx, a true story of a teacher who worked with disadvantaged children, is another film also set in the Bronx released in 2005. The Bronx was the setting for the 1983 film Fuga dal Bronx, also known as Bronx Warriors 2 and Escape 2000, an Italian B-movie best known for its appearance on the television series Mystery Science Theatre 3000. The plot revolves around a sinister construction corporation's plans to depopulate, destroy and redevelop the Bronx, and a band of rebels who are out to expose the corporation's murderous ways and save their homes. The film is memorable for its almost incessant use of the phrase, "Leave the Bronx!" Many of the movie's scenes were filmed in Queens, substituting as the Bronx. Rumble in the Bronx was a 1995 Jackie Chan kung-fu film, another which popularised the Bronx to international audiences. Last Bronx, a 1996 Sega game played on the bad reputation of the Bronx to lend its name to an alternate version of post-Japanese bubble Tokyo, where crime and gang warfare is rampant.
Bronx native Nancy Savoca's 1989 comedy, True Love, explores two Italian-American Bronx sweethearts in the days before their wedding. The film, which debuted Annabella Sciorra and Ron Eldard as the betrothed couple, won the Grand Jury Prize at that year's Sundance Film Festival. The CBS television sitcom Becker, 1998–2004, was more ambiguous. The show starred Ted Danson as Dr. John Becker, a doctor who operated a small practice and was constantly annoyed by his patients, co-workers, friends, and practically everything and everybody else in his world. It showed his everyday life as a doctor working in a small clinic in the Bronx.
Penny Marshall's 1990 film Awakenings, which was nominated for several Oscars, is based on neurologist Oliver Sacks' 1973 account of his psychiatric patients at Beth Abraham Hospital in the Bronx who were paralyzed by a form of encephalitis but briefly responded to the drug L-dopa. Robin Williams played the physician; Robert De Niro was one of the patients who emerged from a catatonic (frozen) state. The home of Williams' character was shot not far from Sacks' actual City Island residence. A 1973 Yorkshire Television documentary and "A Kind of Alaska", a 1985 play by Harold Pinter, were also based on Sacks' book.
The Bronx has been featured significantly in fiction literature. All of the characters in Herman Wouk's City Boy: The Adventures of Herbie Bookbinder (1948) live in the Bronx, and about half of the action is set there. Kate Simon's Bronx Primitive: Portraits of a Childhood is directly autobiographical, a warm account of a Polish-Jewish girl in an immigrant family growing up before World War II, and living near Arthur Avenue and Tremont Avenue. In Jacob M. Appel's short story, "The Grand Concourse" (2007), a woman who grew up in the iconic Lewis Morris Building returns to the Morrisania neighborhood with her adult daughter. Similarly, in Avery Corman's book The Old Neighborhood (1980), an upper-middle class white protagonist returns to his birth neighborhood (Fordham Road and the Grand Concourse), and learns that even though the folks are poor, Hispanic and African-American, they are good people.
By contrast, Tom Wolfe's Bonfire of the Vanities (1987) portrays a wealthy, white protagonist, Sherman McCoy, getting lost off the Major Deegan Expressway in the South Bronx and having an altercation with locals. A substantial piece of the last part of the book is set in the resulting riotous trial at the Bronx County Courthouse. However, times change, and in 2007, the New York Times reported that "the Bronx neighborhoods near the site of Sherman's accident are now dotted with townhouses and apartments." In the same article, the Reverend Al Sharpton (whose fictional analogue in the novel is "Reverend Bacon") asserts that "twenty years later, the cynicism of The Bonfire of the Vanities is as out of style as Tom Wolfe's wardrobe."
It threatened the collapse of large financial institutions, which was prevented by the bailout of banks by national governments, but stock markets still dropped worldwide. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing "a complete evaporation of liquidity".
The bursting of the U.S. (United States) housing bubble, which peaked in 2004, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009.
Many causes for the financial crisis have been suggested, with varying weight assigned by experts. The U.S. Senate's Levin–Coburn Report concluded that the crisis was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street." The Financial Crisis Inquiry Commission concluded that the financial crisis was avoidable and was caused by "widespread failures in financial regulation and supervision", "dramatic failures of corporate governance and risk management at many systemically important financial institutions", "a combination of excessive borrowing, risky investments, and lack of transparency" by financial institutions, ill preparation and inconsistent action by government that "added to the uncertainty and panic", a "systemic breakdown in accountability and ethics", "collapsing mortgage-lending standards and the mortgage securitization pipeline", deregulation of over-the-counter derivatives, especially credit default swaps, and "the failures of credit rating agencies" to correctly price risk. The 1999 repeal of the Glass-Steagall Act effectively removed the separation between investment banks and depository banks in the United States. Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. Research into the causes of the financial crisis has also focused on the role of interest rate spreads.
As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses.
Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U.S. continues to drain wealth from consumers and erodes the financial strength of banking institutions. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally.
While the housing and credit bubbles were building, a series of factors caused the financial system to both expand and become increasingly fragile, a process called financialization. U.S. Government policy from the 1970s onward has emphasized deregulation to encourage business, which resulted in less oversight of activities and less disclosure of information about new activities undertaken by banks and other evolving financial institutions. Thus, policymakers did not immediately recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations.
These institutions, as well as certain regulated banks, had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to provide funds to encourage lending and restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments.
The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It concluded that "the crisis was avoidable and was caused by: widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; an explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels".
During a period of tough competition between mortgage lenders for revenue and market share, and when the supply of creditworthy borrowers was limited, mortgage lenders relaxed underwriting standards and originated riskier mortgages to less creditworthy borrowers. In the view of some analysts, the relatively conservative government-sponsored enterprises (GSEs) policed mortgage originators and maintained relatively high underwriting standards prior to 2003. However, as market power shifted from securitizers to originators and as intense competition from private securitizers undermined GSE power, mortgage standards declined and risky loans proliferated. The worst loans were originated in 2004–2007, the years of the most intense competition between securitizers and the lowest market share for the GSEs.
The majority report of the Financial Crisis Inquiry Commission, written by the six Democratic appointees, the minority report, written by 3 of the 4 Republican appointees, studies by Federal Reserve economists, and the work of several independent scholars generally contend that government affordable housing policy was not the primary cause of the financial crisis. Although they concede that governmental policies had some role in causing the crisis, they contend that GSE loans performed better than loans securitized by private investment banks, and performed better than some loans originated by institutions that held loans in their own portfolios. Paul Krugman has even claimed that the GSE never purchased subprime loans – a claim that is widely disputed.
In his dissent to the majority report of the Financial Crisis Inquiry Commission, American Enterprise Institute fellow Peter J. Wallison stated his belief that the roots of the financial crisis can be traced directly and primarily to affordable housing policies initiated by HUD in the 1990s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac. Later, based upon information in the SEC's December 2011 securities fraud case against 6 ex-executives of Fannie and Freddie, Peter Wallison and Edward Pinto estimated that, in 2008, Fannie and Freddie held 13 million substandard loans totaling over $2 trillion.
In the early and mid-2000s, the Bush administration called numerous times for investigation into the safety and soundness of the GSEs and their swelling portfolio of subprime mortgages. On September 10, 2003, the House Financial Services Committee held a hearing at the urging of the administration to assess safety and soundness issues and to review a recent report by the Office of Federal Housing Enterprise Oversight (OFHEO) that had uncovered accounting discrepancies within the two entities. The hearings never resulted in new legislation or formal investigation of Fannie Mae and Freddie Mac, as many of the committee members refused to accept the report and instead rebuked OFHEO for their attempt at regulation. Some believe this was an early warning to the systemic risk that the growing market in subprime mortgages posed to the U.S. financial system that went unheeded.
A 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 showed that $467 billion of mortgage lending was made by Community Reinvestment Act (CRA)-covered lenders into low and mid level income (LMI) borrowers and neighborhoods, representing 10% of all U.S. mortgage lending during the period. The majority of these were prime loans. Sub-prime loans made by CRA-covered institutions constituted a 3% market share of LMI loans in 1998, but in the run-up to the crisis, fully 25% of all sub-prime lending occurred at CRA-covered institutions and another 25% of sub-prime loans had some connection with CRA. In addition, an analysis by the Federal Reserve Bank of Dallas in 2009, however, concluded that the CRA was not responsible for the mortgage loan crisis, pointing out that CRA rules have been in place since 1995 whereas the poor lending emerged only a decade later. Furthermore, most sub-prime loans were not made to the LMI borrowers targeted by the CRA, especially in the years 2005–2006 leading up to the crisis. Nor did it find any evidence that lending under the CRA rules increased delinquency rates or that the CRA indirectly influenced independent mortgage lenders to ramp up sub-prime lending.
To other analysts the delay between CRA rule changes (in 1995) and the explosion of subprime lending is not surprising, and does not exonerate the CRA. They contend that there were two, connected causes to the crisis: the relaxation of underwriting standards in 1995 and the ultra-low interest rates initiated by the Federal Reserve after the terrorist attack on September 11, 2001. Both causes had to be in place before the crisis could take place. Critics also point out that publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007. They also argue that the Federal Reserve’s classification of CRA loans as “prime” is based on the faulty and self-serving assumption that high-interest-rate loans (3 percentage points over average) equal “subprime” loans.
Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that "There weren’t enough Americans with [bad] credit taking out [bad loans] to satisfy investors' appetite for the end product." Essentially, investment banks and hedge funds used financial innovation to enable large wagers to be made, far beyond the actual value of the underlying mortgage loans, using derivatives called credit default swaps, collateralized debt obligations and synthetic CDOs.
Countering Krugman, Peter J. Wallison wrote: "It is not true that every bubble—even a large bubble—has the potential to cause a financial crisis when it deflates." Wallison notes that other developed countries had "large bubbles during the 1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 [bubble] deflated." According to Wallison, the reason the U.S. residential housing bubble (as opposed to other types of bubbles) led to financial crisis was that it was supported by a huge number of substandard loans – generally with low or no downpayments.
Krugman's contention (that the growth of a commercial real estate bubble indicates that U.S. housing policy was not the cause of the crisis) is challenged by additional analysis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We find limited evidence that substantial deterioration in CMBS [commercial mortgage-backed securities] loan underwriting occurred prior to the crisis." Other analysts support the contention that the crisis in commercial real estate and related lending took place after the crisis in residential real estate. Business journalist Kimberly Amadeo reports: "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects. Denice A. Gierach, a real estate attorney and CPA, wrote:
In a Peabody Award winning program, NPR correspondents argued that a "Giant Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. This pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with products such as the mortgage-backed security and the collateralized debt obligation that were assigned safe ratings by the credit rating agencies.
The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested.
By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with adjustable-rate mortgages could not refinance to avoid the higher payments associated with rising interest rates and began to default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%.
Lower interest rates encouraged borrowing. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and the September 2001 terrorist attacks, as well as to combat a perceived risk of deflation. As early as 2002 it was apparent that credit was fueling housing instead of business investment as some economists went so far as to advocate that the Fed "needs to create a housing bubble to replace the Nasdaq bubble". Moreover, empirical studies using data from advanced countries show that excessive credit growth contributed greatly to the severity of the crisis.
Bernanke explained that between 1996 and 2004, the U.S. current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the country to borrow large sums from abroad, much of it from countries running trade surpluses. These were mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the U.S.) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the U.S. to finance its imports.
The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates, and it became riskier to speculate in housing. U.S. housing and financial assets dramatically declined in value after the housing bubble burst.
Testimony given to the Financial Crisis Inquiry Commission by Richard M. Bowen III on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for Citigroup (where he was responsible for over 220 professional underwriters) suggests that by the final years of the U.S. housing bubble (2006–2007), the collapse of mortgage underwriting standards was endemic. His testimony stated that by 2006, 60% of mortgages purchased by Citi from some 1,600 mortgage companies were "defective" (were not underwritten to policy, or did not contain all policy-required documents) – this, despite the fact that each of these 1,600 originators was contractually responsible (certified via representations and warrantees) that its mortgage originations met Citi's standards. Moreover, during 2007, "defective mortgages (from mortgage originators contractually bound to perform underwriting to Citi's standards) increased... to over 80% of production".
In separate testimony to Financial Crisis Inquiry Commission, officers of Clayton Holdings—the largest residential loan due diligence and securitization surveillance company in the United States and Europe—testified that Clayton's review of over 900,000 mortgages issued from January 2006 to June 2007 revealed that scarcely 54% of the loans met their originators’ underwriting standards. The analysis (conducted on behalf of 23 investment and commercial banks, including 7 "too big to fail" banks) additionally showed that 28% of the sampled loans did not meet the minimal standards of any issuer. Clayton's analysis further showed that 39% of these loans (i.e. those not meeting any issuer's minimal underwriting standards) were subsequently securitized and sold to investors.
Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. A classic bait-and-switch method was used by Countrywide Financial, advertising low interest rates for home refinancing. Such loans were written into extensively detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement might state that 1% or 1.5% interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the amount of interest paid. This created negative amortization, which the credit consumer might not notice until long after the loan transaction had been consummated.
Countrywide, sued by California Attorney General Jerry Brown for "unfair business practices" and "false advertising" was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments". When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their home equity had disappeared. This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender.
Critics such as economist Paul Krugman and U.S. Treasury Secretary Timothy Geithner have argued that the regulatory framework did not keep pace with financial innovation, such as the increasing importance of the shadow banking system, derivatives and off-balance sheet financing. A recent OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include:
Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators to monitor and try to reduce financial institution risk levels. These instruments also made it virtually impossible to reorganize financial institutions in bankruptcy, and contributed to the need for government bailouts.
From 2004 to 2007, the top five U.S. investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to a financial shock. Changes in capital requirements, intended to keep U.S. banks competitive with their European counterparts, allowed lower risk weightings for AAA securities. The shift from first-loss tranches to AAA tranches was seen by regulators as a risk reduction that compensated the higher leverage. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. Lehman Brothers went bankrupt and was liquidated, Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation. With the exception of Lehman, these companies required or received government support. Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale. However, both Barclays and Bank of America ultimately declined to purchase the entire company.
Behavior that may be optimal for an individual (e.g., saving more during adverse economic conditions) can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save (or pay down debt) simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets.
During April 2009, U.S. Federal Reserve vice-chair Janet Yellen discussed these paradoxes: "Once this massive credit crunch hit, it didn’t take long before we were in a recession. The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy. Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole."
The term financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. Examples pertinent to this crisis included: the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps (CDS). The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial institutions.
CDO issuance grew from an estimated $20 billion in Q1 2004 to its peak of over $180 billion by Q1 2007, then declined back under $20 billion by Q1 2008. Further, the credit quality of CDO's declined from 2000 to 2007, as the level of subprime and other non-prime mortgage debt increased from 5% to 36% of CDO assets. As described in the section on subprime lending, the CDS and portfolio of CDS called synthetic CDO enabled a theoretically infinite amount to be wagered on the finite value of housing loans outstanding, provided that buyers and sellers of the derivatives could be found. For example, buying a CDS to insure a CDO ended up giving the seller the same risk as if they owned the CDO, when those CDO's became worthless.
This boom in innovative financial products went hand in hand with more complexity. It multiplied the number of actors connected to a single mortgage (including mortgage brokers, specialized originators, the securitizers and their due diligence firms, managing agents and trading desks, and finally investors, insurances and providers of repo funding). With increasing distance from the underlying asset these actors relied more and more on indirect information (including FICO scores on creditworthiness, appraisals and due diligence checks by third party organizations, and most importantly the computer models of rating agencies and risk management desks). Instead of spreading risk this provided the ground for fraudulent acts, misjudgments and finally market collapse. In 2005 a group of computer scientists built a computational model for the mechanism of biased ratings produced by rating agencies, which turned out to be adequate to what actually happened in 2006–2008.[citation needed]
The pricing of risk refers to the incremental compensation required by investors for taking on additional risk, which may be measured by interest rates or fees. Several scholars have argued that a lack of transparency about banks' risk exposures prevented markets from correctly pricing risk before the crisis, enabled the mortgage market to grow larger than it otherwise would have, and made the financial crisis far more disruptive than it would have been if risk levels had been disclosed in a straightforward, readily understandable format.
For a variety of reasons, market participants did not accurately measure the risk inherent with financial innovation such as MBS and CDOs or understand its impact on the overall stability of the financial system. For example, the pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. Banks estimated that $450bn of CDO were sold between "late 2005 to the middle of 2007"; among the $102bn of those that had been liquidated, JPMorgan estimated that the average recovery rate for "high quality" CDOs was approximately 32 cents on the dollar, while the recovery rate for mezzanine CDO was approximately five cents for every dollar.
Another example relates to AIG, which insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted. However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September 2008. U.S. taxpayers provided over $180 billion in government support to AIG during 2008 and early 2009, through which the money flowed to various counterparties to CDS transactions, including many large global financial institutions.
As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came to rely on them, accepted as valid some complex mathematical models which theoretically showed the risks were much smaller than they actually proved to be. George Soros commented that "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility."
Moreover, a conflict of interest between professional investment managers and their institutional clients, combined with a global glut in investment capital, led to bad investments by asset managers in over-priced credit assets. Professional investment managers generally are compensated based on the volume of client assets under management. There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation. As the glut in global investment capital caused the yields on credit assets to decline, asset managers were faced with the choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients. Many asset managers chose to continue to invest client funds in over-priced (under-yielding) investments, to the detriment of their clients, in order to maintain their assets under management. This choice was supported by a "plausible deniability" of the risks associated with subprime-based credit assets because the loss experience with early "vintages" of subprime loans was so low.
Despite the dominance of the above formula, there are documented attempts of the financial industry, occurring before the crisis, to address the formula limitations, specifically the lack of dependence dynamics and the poor representation of extreme events. The volume "Credit Correlation: Life After Copulas", published in 2007 by World Scientific, summarizes a 2006 conference held by Merrill Lynch in London where several practitioners attempted to propose models rectifying some of the copula limitations. See also the article by Donnelly and Embrechts and the book by Brigo, Pallavicini and Torresetti, that reports relevant warnings and research on CDOs appeared in 2006.
In a June 2008 speech, President and CEO of the New York Federal Reserve Bank Timothy Geithner—who in 2009 became Secretary of the United States Treasury—placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because of maturity mismatch, meaning that they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities:
The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of securitization are "likely to vanish forever, having been an artifact of excessively loose credit conditions."
Economist Mark Zandi testified to the Financial Crisis Inquiry Commission in January 2010: "The securitization markets also remain impaired, as investors anticipate more loan losses. Investors are also uncertain about coming legal and accounting rule changes and regulatory reforms. Private bond issuance of residential and commercial mortgage-backed securities, asset-backed securities, and CDOs peaked in 2006 at close to $2 trillion...In 2009, private issuance was less than $150 billion, and almost all of it was asset-backed issuance supported by the Federal Reserve's TALF program to aid credit card, auto and small-business lenders. Issuance of residential and commercial mortgage-backed securities and CDOs remains dormant."
Rapid increases in a number of commodity prices followed the collapse in the housing bubble. The price of oil nearly tripled from $50 to $147 from early 2007 to 2008, before plunging as the financial crisis began to take hold in late 2008. Experts debate the causes, with some attributing it to speculative flow of money from housing and other investments into commodities, some to monetary policy, and some to the increasing feeling of raw materials scarcity in a fast-growing world, leading to long positions taken on those markets, such as Chinese increasing presence in Africa. An increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states. A pattern of spiking instability in the price of oil over the decade leading up to the price high of 2008 has been recently identified. The destabilizing effects of this price variance has been proposed as a contributory factor in the financial crisis.
In testimony before the Senate Committee on Commerce, Science, and Transportation on June 3, 2008, former director of the CFTC Division of Trading & Markets (responsible for enforcement) Michael Greenberger specifically named the Atlanta-based IntercontinentalExchange, founded by Goldman Sachs, Morgan Stanley and BP as playing a key role in speculative run-up of oil futures prices traded off the regulated futures exchanges in London and New York. However, the IntercontinentalExchange (ICE) had been regulated by both European and U.S. authorities since its purchase of the International Petroleum Exchange in 2001. Mr Greenberger was later corrected on this matter.
Feminist economists Ailsa McKay and Margunn Bjørnholt argue that the financial crisis and the response to it revealed a crisis of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession. They argue that such a reshaping should include new advances within feminist economics and ecological economics that take as their starting point the socially responsible, sensible and accountable subject in creating an economy and economic theories that fully acknowledge care for each other as well as the planet.
Current Governor of the Reserve Bank of India Raghuram Rajan had predicted the crisis in 2005 when he became chief economist at the International Monetary Fund.In 2005, at a celebration honouring Alan Greenspan, who was about to retire as chairman of the US Federal Reserve, Rajan delivered a controversial paper that was critical of the financial sector. In that paper, "Has Financial Development Made the World Riskier?", Rajan "argued that disaster might loom." Rajan argued that financial sector managers were encouraged to "take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks. But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialise, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimised."
The financial crisis was not widely predicted by mainstream economists except Raghuram Rajan, who instead spoke of the Great Moderation. A number of heterodox economists predicted the crisis, with varying arguments. Dirk Bezemer in his research credits (with supporting argument and estimates of timing) 12 economists with predicting the crisis: Dean Baker (US), Wynne Godley (UK), Fred Harrison (UK), Michael Hudson (US), Eric Janszen (US), Steve Keen (Australia), Jakob Brøchner Madsen & Jens Kjaer Sørensen (Denmark), Kurt Richebächer (US), Nouriel Roubini (US), Peter Schiff (US), and Robert Shiller (US). Examples of other experts who gave indications of a financial crisis have also been given. Not surprisingly, the Austrian economic school regarded the crisis as a vindication and classic example of a predictable credit-fueled bubble that could not forestall the disregarded but inevitable effect of an artificial, manufactured laxity in monetary supply, a perspective that even former Fed Chair Alan Greenspan in Congressional testimony confessed himself forced to return to.
A cover story in BusinessWeek magazine claims that economists mostly failed to predict the worst international economic crisis since the Great Depression of the 1930s. The Wharton School of the University of Pennsylvania's online business journal examines why economists failed to predict a major global financial crisis. Popular articles published in the mass media have led the general public to believe that the majority of economists have failed in their obligation to predict the financial crisis. For example, an article in the New York Times informs that economist Nouriel Roubini warned of such crisis as early as September 2006, and the article goes on to state that the profession of economics is bad at predicting recessions. According to The Guardian, Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while The New York Times labelled him "Dr. Doom".
Stock trader and financial risk engineer Nassim Nicholas Taleb, author of the 2007 book The Black Swan, spent years warning against the breakdown of the banking system in particular and the economy in general owing to their use of bad risk models and reliance on forecasting, and their reliance on bad models, and framed the problem as part of "robustness and fragility". He also took action against the establishment view by making a big financial bet on banking stocks and making a fortune from the crisis ("They didn't listen, so I took their money"). According to David Brooks from the New York Times, "Taleb not only has an explanation for what’s happening, he saw it coming."
Market strategist Phil Dow believes distinctions exist "between the current market malaise" and the Great Depression. He says the Dow Jones average's fall of more than 50% over a period of 17 months is similar to a 54.7% fall in the Great Depression, followed by a total drop of 89% over the following 16 months. "It's very troubling if you have a mirror image," said Dow. Floyd Norris, the chief financial correspondent of The New York Times, wrote in a blog entry in March 2009 that the decline has not been a mirror image of the Great Depression, explaining that although the decline amounts were nearly the same at the time, the rates of decline had started much faster in 2007, and that the past year had only ranked eighth among the worst recorded years of percentage drops in the Dow. The past two years ranked third, however.
One of the first victims was Northern Rock, a medium-sized British bank. The highly leveraged nature of its business led the bank to request security from the Bank of England. This in turn led to investor panic and a bank run in mid-September 2007. Calls by Liberal Democrat Treasury Spokesman Vince Cable to nationalise the institution were initially ignored; in February 2008, however, the British government (having failed to find a private sector buyer) relented, and the bank was taken into public hands. Northern Rock's problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions.
The first visible institution to run into trouble in the United States was the Southern California–based IndyMac, a spin-off of Countrywide Financial. Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles market and the seventh largest mortgage originator in the United States. The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure in United States history up until the crisis precipitated even larger failures, and the second largest failure of a regulated thrift. IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank. IndyMac Bancorp filed for Chapter 7 bankruptcy in July 2008.
IndyMac often made loans without verification of the borrower’s income or assets, and to borrowers with poor credit histories. Appraisals obtained by IndyMac on underlying collateral were often questionable as well. As an Alt-A lender, IndyMac’s business model was to offer loan products to fit the borrower’s needs, using an extensive array of risky option-adjustable-rate-mortgages (option ARMs), subprime loans, 80/20 loans, and other nontraditional products. Ultimately, loans were made to many borrowers who simply could not afford to make their payments. The thrift remained profitable only as long as it was able to sell those loans in the secondary mortgage market. IndyMac resisted efforts to regulate its involvement in those loans or tighten their issuing criteria: see the comment by Ruthann Melbourne, Chief Risk Officer, to the regulating agencies.
IndyMac reported that during April 2008, Moody's and Standard & Poor's downgraded the ratings on a significant number of Mortgage-backed security (MBS) bonds including $160 million of those issued by IndyMac and which the bank retained in its MBS portfolio. IndyMac concluded that these downgrades would have negatively impacted the Company's risk-based capital ratio as of June 30, 2008. Had these lowered ratings been in effect at March 31, 2008, IndyMac concluded that the bank's capital ratio would have been 9.27% total risk-based. IndyMac warned that if its regulators found its capital position to have fallen below "well capitalized" (minimum 10% risk-based capital ratio) to "adequately capitalized" (8–10% risk-based capital ratio) the bank might no longer be able to use brokered deposits as a source of funds.
Senator Charles Schumer (D-NY) would later point out that brokered deposits made up more than 37 percent of IndyMac's total deposits and ask the Federal Deposit Insurance Corporation (FDIC) whether it had considered ordering IndyMac to reduce its reliance on these deposits. With $18.9 billion in total deposits reported on March 31, Senator Schumer would have been referring to a little over $7 billion in brokered deposits. While the breakout of maturities of these deposits is not known exactly, a simple averaging would have put the threat of brokered deposits loss to IndyMac at $500 million a month, had the regulator disallowed IndyMac from acquiring new brokered deposits on June 30.
When home prices declined in the latter half of 2007 and the secondary mortgage market collapsed, IndyMac was forced to hold $10.7 billion of loans it could not sell in the secondary market. Its reduced liquidity was further exacerbated in late June 2008 when account holders withdrew $1.55 billion or about 7.5% of IndyMac's deposits. This “run” on the thrift followed the public release of a letter from Senator Charles Schumer to the FDIC and OTS. The letter outlined the Senator’s concerns with IndyMac. While the run was a contributing factor in the timing of IndyMac’s demise, the underlying cause of the failure was the unsafe and unsound manner in which the thrift was operated.
On July 11, 2008, citing liquidity concerns, the FDIC put IndyMac Bank into conservatorship. A bridge bank, IndyMac Federal Bank, FSB, was established to assume control of IndyMac Bank's assets, its secured liabilities, and its insured deposit accounts. The FDIC announced plans to open IndyMac Federal Bank, FSB on July 14, 2008. Until then, depositors would have access their insured deposits through ATMs, their existing checks, and their existing debit cards. Telephone and Internet account access was restored when the bank reopened. The FDIC guarantees the funds of all insured accounts up to US$100,000, and has declared a special advance dividend to the roughly 10,000 depositors with funds in excess of the insured amount, guaranteeing 50% of any amounts in excess of $100,000. Yet, even with the pending sale of Indymac to IMB Management Holdings, an estimated 10,000 uninsured depositors of Indymac are still at a loss of over $270 million.
Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial, as they could no longer obtain financing through the credit markets. Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The financial institution crisis hit its peak in September and October 2008. Several major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup, and AIG. On Oct. 6, 2008, three weeks after Lehman Brothers filed the largest bankruptcy in U.S. history, Lehman's former CEO found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm.
In September 2008, the crisis hit its most critical stage. There was the equivalent of a bank run on the money market funds, which frequently invest in commercial paper issued by corporations to fund their operations and payrolls. Withdrawal from money markets were $144.5 billion during one week, versus $7.1 billion the week prior. This interrupted the ability of corporations to rollover (replace) their short-term debt. The U.S. government responded by extending insurance for money market accounts analogous to bank deposit insurance via a temporary guarantee and with Federal Reserve programs to purchase commercial paper. The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008.
Economist Paul Krugman and U.S. Treasury Secretary Timothy Geithner explain the credit crisis via the implosion of the shadow banking system, which had grown to nearly equal the importance of the traditional commercial banking sector as described above. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations.
This meant that nearly one-third of the U.S. lending mechanism was frozen and continued to be frozen into June 2009. According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume". The authors also indicate that some forms of securitization are "likely to vanish forever, having been an artifact of excessively loose credit conditions". While traditional banks have raised their lending standards, it was the collapse of the shadow banking system that is the primary cause of the reduction in funds available for borrowing.
There is a direct relationship between declines in wealth and declines in consumption and business investment, which along with government spending, represent the economic engine. Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth.[citation needed] By early November 2008, a broad U.S. stock index the S&P 500, was down 45% from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22%, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total a staggering $8.3 trillion. Since peaking in the second quarter of 2007, household wealth is down $14 trillion.
In November 2008, economist Dean Baker observed: "There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007... While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6 trillion in housing wealth and an even larger amount of stock wealth.

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