THE WINDS OF CHANGE ★^1129and more “subprime” mortgages— risky loans to people who lacked the income
to meet their monthly payments. The initially low interest rates on these loans
were set to rise dramatically after a year or two. Banks assumed that home prices
would keep rising, and if they had to foreclose, they could easily resell the prop-
erty at a profit.
Wall Street bankers developed complex new ways of repackaging and sell-
ing these mortgages to investors. Insurance companies, including the world’s
largest, American International Group (AIG), insured these new financial prod-
ucts against future default. Credit rating agencies gave these securities their
highest ratings, even though they were based on loans that clearly would never
be repaid. Believing that the market must be left to regulate itself, the Federal
Reserve Bank and other regulatory agencies did nothing to slow the speculative
frenzy. Banks and investment firms reported billions of dollars in profits, and
rewarded their executives with unheard- of bonuses.
The Great Recession
In 2006 and 2007, overbuilding had reached the point where home prices
began to fall. More and more home owners found themselves owing more
money than their homes were worth. As mortgage rates reset, increasing num-
bers of borrowers defaulted— that is, they could no longer meet their monthly
mortgage payments. The value of the new mortgage- based securities fell pre-
cipitously. Banks suddenly found themselves with billions of dollars of worth-
less investments on their books. In 2008, the situation became a full- fledged
crisis, as banks stopped making loans, business dried up, and the stock mar-
ket collapsed. Once above 14,000, the Dow Jones Industrial Average plunged
to around 8,000—the worst percentage decline since 1931. Lehman Brothers, a
venerable investment house, recorded a $2.3 billion loss and went out of exis-
tence, in history’s biggest bankruptcy. Leading banks seemed to be on the verge
of failure. With the value of their homes and stock market accounts in free fall,
Americans cut back on spending, leading to business failures and a rapid rise in
unemployment. By the end of 2008, 2.5 million jobs had been lost— the most in
any year since the end of World War II.
In the last three months of 2008, and again in the first three of 2009, the gross
domestic product of the United States decreased by 6 percent— a remarkably steep
contraction. Even worse than the economic meltdown was the meltdown of con-
fidence as millions of Americans lost their jobs and/or their homes and saw their
retirement savings and pensions, if invested in the stock market, disappear. In
April 2009, the recession that began in December 2007 became the longest since
the Great Depression.
In the Great Recession, the mortgage crisis affected minorities the most.
Many had been steered by banks into subprime mortgages even when they had
What events eroded support for President Bush’s policies during his second term?