— Ch. 1 · Origins Of The Bubble —
2008 financial crisis.
~5 min read · Ch. 1 of 6
In 2004, the Federal Reserve began raising interest rates after years of keeping them near zero. This shift marked the end of an era where cheap money fueled a housing boom that had lasted since the early 1990s. Home prices climbed steadily during this period, rising by 124% between 1998 and 2006 in many parts of the country. Lenders relaxed their standards to keep up with demand, issuing subprime mortgages to borrowers who could not afford them under traditional rules. By 2006, nearly one-third of all new home loans were classified as subprime or no-documentation loans. These risky loans made up about 20% of total mortgage originations at the peak of the bubble. Financial institutions bundled these mortgages into complex securities called mortgage-backed securities and sold them to investors worldwide. Credit rating agencies assigned high ratings to these products despite their underlying risk. When home values stopped rising, borrowers began defaulting on their payments. Foreclosure proceedings started accelerating in 2007, affecting over 1.3 million properties that year alone.
The Lehman Collapse
On the 15th of September 2008, Lehman Brothers filed for bankruptcy, becoming the largest financial collapse in U.S. history. The firm was once the fourth-largest investment bank behind Goldman Sachs, Morgan Stanley, and Merrill Lynch. Its failure sent shockwaves through global markets, causing the Dow Jones Industrial Average to drop more than 500 points in a single day. Investors withdrew $144 billion from money market funds just days later, triggering a run on short-term lending markets. The TED spread, an indicator of perceived credit risk, spiked to a record 4.65% by the 10th of October 2008. Central banks around the world responded with emergency measures to stabilize the system. In the United States, the Federal Reserve stepped in to support other struggling institutions like American International Group. Without government intervention, many experts believed the entire financial system could have collapsed within weeks. The panic spread quickly beyond Wall Street, affecting businesses and households across the globe.