Economy Makes 2008 A Year To Forget

In 2008, stocks plunged, the economy shrank, oil prices spiked, the credit markets ground to a halt and major financial institutions breathed their last. At the end of the year, financial adviser Bernie Madoff was charged with running a $50 billion Ponzi scheme.

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ROBERT SIEGEL, Host:

One year ago today, the Dow Jones industrial average was above 13,000, Lehman Brothers was one of the giants of the investment banking world and few Americans had ever heard of Bernie Madoff. Well, 2008 turned out to be a stomach-churning year for investors and for the economy as a whole. And it was a year of extraordinary government intervention in the economy. NPR's Jim Zarroli has covered it all, and he looks back at the year.

JIM ZARROLI: Today, I asked economist David Resler of Nomura Securities a question. If I had just come in from Mars and had asked him to describe what 2008 was like for the economy, what would he say?

Mr. DAVID RESLER (Chief Economist, Nomura Securities): First thing I want to do is encourage you to get back on your spaceship and go back to Mars.

(Soundbite of laughter)

Mr. RESLER: You don't want to be here. No question, 2008 was one of the most disappointing and surprising years, in almost every way, that I've ever seen in my career. And I've been doing this a very long time, 40 years or so.

ZARROLI: At the start of 2008, it was clear the economy was growing weaker. But there were bright spots. The declining dollar was thought to be good for U.S. exports. Within weeks, it was clear the economy was entering uncharted territory. One weekend in March, the venerable investment bank Bear Stearns collapsed under the weight of bad mortgage debt and was sold at fire sale prices. CEO Alan Schwartz spoke about what happened at a congressional hearing.

(Soundbite of congressional hearing)

Mr. ALAN SCHWARTZ (Former CEO, Bear Stearns): The choices we faced that Friday night were stark - find a party willing to acquire Bear Stearns by Sunday night, or face what my advisers were telling me could be a bankruptcy filing on Monday morning.

ZARROLI: In the months that followed, some major financial institutions would follow Bear onto the scrapheap: Merrill Lynch, Washington Mutual, IndyMac Bank. The Bush administration's response was sometimes criticized as ad hoc and erratic. It let the investment bank Lehman Brothers slide into bankruptcy. David Wyss is chief economist at Standard and Poor's.

Mr. DAVID WYSS (Chief Economist, Standard and Poor's): That scared a lot of people because they don't know what the Fed was doing. They didn't understand what was safe and wasn't safe.

ZARROLI: But the Treasury Department and the Federal Reserve rushed to rescue the insurance giant AIG. And in September, Treasury Secretary Henry Paulson announced the bailout of the mortgage giants Fannie Mae and Freddie Mac. The two played a vital role in the mortgage markets and Paulson said they were too big to fail.

(Soundbite of statement by Henry Paulson)

Mr. HENRY PAULSON (U.S. Treasury Secretary): A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

ZARROLI: It was one of a series of extraordinary interventions by the federal government that would fundamentally reshape the relationship between Washington and Wall Street. These rescue measures were meant to restore confidence in the banking sector, and for awhile they seemed to work, but they never fully succeeded.

And with economies slowing around the world, U.S. officials had to raise the stakes. In October, Congress approved an enormous $700 billion bailout fund to help the financial sector. President Bush announced the government would buy stock in U.S. banks in an effort to flood the system with money and get lenders lending again.

(Soundbite of statement by President George W. Bush)

President GEORGE W. BUSH: This is an essential short-term measure to ensure the viability of America's banking system.

ZARROLI: But despite those efforts, the credit market seized up. Banks were afraid to lend and even strong, healthy companies had trouble raising money. As the months passed, the unemployment rate climbed from five to 6.7 percent. The Dow Jones industrial average slipped below 10,000, then 9,000, then 8,000. Economist David Resler says triple-digit swings in the Dow grew routine.

Mr. RESLER: Literally, some days in which the high-to-low swing was close to a thousand points - that's unprecedented, much like - much of else that we've seen in 2008.

ZARROLI: Today, the credit markets have thawed a bit. Oil prices have fallen and mortgage rates have come down. But the economy has lost jobs every month this year. And as 2008 draws to a close, most economists expect the recession to get worse before it gets better. Jim Zarroli, NPR News, New York.

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