The Great Financial Crisis 2007-2008

• Today’s article is a heavily referenced post on the Great Financial Crisis of 2007-2008.

• The current Great Financial Crisis and global economic downturn has many in the present looking into the past for wisdom or answers to the many questions.
• Many investors are looking for similar situations, in order to formulate a plan for recovery and to understand the complex inter workings of banks, federal agencies and the economy.
• This was a severe economic crisis, which was second in size and severity only to the Great Depression of 1920.
• It is well described in Wilkipedia:

The financial crisis of 2008, or Global Financial Crisis, was a severe worldwide economic crisis that occurred in the early 21st century. It was the most serious financial crisis since the Great Depression (1929). Predatory lending targeting low-income homebuyers,[1] excessive risk-taking by global financial institutions,[2] and the bursting of the United States housing bubble culminated in a "perfect storm." Mortgage-backed securities (MBS) tied to American real estate, as well as a vast web of derivatives linked to those MBS, collapsed in value. Financial institutions worldwide suffered severe damage,[3] reaching a climax with the bankruptcy of Lehman Brothers on September 15, 2008, and a subsequent international banking crisis.[4]
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This Great Financial Crisis of 2007-2008 is also described well in the encyclopedic like site called Britanica:

The financial crisis of 2007–08, also called subprime mortgage crisis, severe contraction of liquidity in global financial markets that originated in the United States as a result of the collapse of the U.S. housing market. It threatened to destroy the international financial system; caused the failure (or near-failure) of several major investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations; and precipitated the Great Recession (2007–09), the worst economic downturn since the Great Depression (1929–c. 1939).
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See distress securities

Additionally Investopedia dose a very nice review of the 2007-2008 Great Financial Crisis called:

The 2007–2008 Financial Crisis in Review.

• And they briefly review all the important points of the global economic crisis.

KEY TAKEAWAYS
The 2007-2009 financial crisis began years earlier with cheap credit and lax lending standards that fueled a housing bubble.
When the bubble burst, financial institutions were left holding trillions of dollars worth of near-worthless investments in subprime mortgages.
Millions of American homeowners found themselves owing more on their mortgages than their homes were worth.
The Great Recession that followed cost many their jobs, their savings, or their homes.
The turnaround began in early 2009 after the passage of the infamous Wall Street bailout kept the banks operating and slowly restarted the economy.
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Investopedia describes the crisis thus:

The financial crisis of 2007-2008 was years in the making. By the summer of 2007, financial markets around the world were showing signs that the reckoning was overdue for a years-long binge on cheap credit. Two Bear Stearns hedge funds had collapsed. BNP Paribas was warning investors that they might not be able to withdraw money from three of its funds, and the British banks Northern Rock was about to seek emergency funding from the banks of England. Yet despite the warning signs, few investors suspected that the worst crisis in nearly eight decades was about to engulf the global financial system, bringing Wall Street's giants to their knees and triggering the Great Recession. It was an epic financial and economic collapse that cost many ordinary people their jobs, their life savings, their homes, or all three.
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Summary:

• Investopedia describes the US Federal Reserve lowering interest rates, rising housing prices, a huge number of new homebuyers could afford homes at these very cheap interest rates, and of course many financial institutions made leveraged investments, using 30-40 times leverage.

• Then something called adjustable rate mortgages caused interest rates to increase from 1 to 5%. Homeowners could no longer afford their mortgages, and after peaking the housing market tumbled down suddenly leaving many homeowners left with mortgages they couldn’t afford, and homes worth less then what they owed on them.

• These homeowners stopped paying, the banks were forced to reprocess the homes, and banks and other lenders took heavy losses.

• Those firms which were heavily leveraged suffered the most, with some banks and lending institutions which were over 100 years old became insolvent, bankrupt and went of business.

• This huge economic crisis was finally dealt with by a huge U.S. Government bailout of insolvent Wall Street banks costing approximately 442 billion US Dollars.

Source:

U.S. Department of the Treasury. "Monthly Report to Congress - August 2018," Page 5.

Other information you may find useful includes an Investopedia article called:

Open Market Operations vs. Quantitative Easing: What’s the Difference?
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Open Market Operations vs. Quantitative Easing: An Overview

The U.S. Federal Reserve was created by the Federal Reserve Act in 1913. The Federal Reserve is the central banking system of the United States of America. It has central control of the U.S. monetary system in order to alleviate financial crises.
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Since its establishment, the Fed, as it is often called, has been responsible for a two-part mandate: (1) promote maximum employment and stable prices, and (2) moderate long-term interest rates. Since 2012, the Fed has mostly targeted a 2% inflation rate, which it uses as a guide for price movement.
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The Fed follows the labor market’s employment capacity and analyzes unemployment along with wage growth in correlation with inflation. The Fed also has the ability to effectively influence interest rates on credit in the economy, which can have a direct effect on business and personal spending.
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With the responsibility and authority to take action in these key areas, the Fed can deploy several tactics. Here, we will discuss two of those: open market operations and quantitative easing (QE).
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Open Market Operations (OMO)

The Federal Open Market Committee has three main tools that it uses to achieve its two-part mandate. Those actions include open market operations, setting the federal funds rate, and specifying reserve requirements for banks.
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For an open market operations strategy, the central bank will create money and buy short-term Treasury securities from banks, individuals, and institutions in the open market. This creates demand for the securities, increasing the price and decreasing their yield.
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The demand for securities injects money into the banking system, which is then loaned to businesses and individuals and puts downward pressure on interest rates. This boosts the economy because businesses and individuals have more money to spend.
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Quantitative Easing (QE)

• A QE strategy is often employed during a crisis and when open market operations have failed. For example, the interest rate may already be at zero, but there is still a slowdown in lending and economic activity. In such situations, the central bank might buy a variety of securities to revive them: long-term treasuries, private securities, or securities in a particular area of the market.*
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Other useful sources of information about the great financial crisis of 2007-2008 are videos from:

Investopedia

Billionaire Warren Buffet explains the 2007-2008 Financial Crisis;

Warren Buffett Explains the 2008 Financial Crisis