As 2008 comes to a close, many people are scratching their heads and thinking, "What in the world just happened to our economy?" Some remarkable financial and economic events have plunged the world into what appears to be the worst recession since World War II. But just a year ago, the huge breakdown was largely unforeseen.
At the end of 2007, a small handful of economists warned of "a severe risk of a systemic breakdown in the economic system, but the vast majority did not see that. It was still very reasonable to say that the economy was not headed for recession," NPR's Adam Davidson tells Renee Montagne.
We now know the economy was already in recession. But at that point, the big themes were: China's growth will continue unimpeded; gasoline prices will stay very high; and "there was a recognition of a housing market crisis, but not anything like the systemic crisis that we did witness," Davidson says.
In the first three months of 2008, amid the tough housing market there was a belief that those who make their living building or selling homes might not have a great year — but that everyone else had dodged a bullet and was safe.
"Then, in March, we had the collapse of Bear Stearns — very shocking. Nothing like that had happened before, but the feeling was 'That's it. We're done. The other major investment banks — Lehman Brothers, Merrill Lynch, Morgan Stanley, certainly the big, broader universal banks like Citibank — are totally safe,' " Davidson says.
A growing number of economists were saying that some scary things were on the horizon, "but the bulk of the voices were 'OK. I think we're OK' — until mid-September. That's when everything really changed."
That's when Lehman Brothers collapsed.
"And then, very quickly over the course of that week, there was a money market mutual fund, called the Reserve Fund, the oldest, the most venerable — it lost money. This is something that never happens to money market mutual funds. That terrified everyone," Davidson says.
And that's when Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson started saying this was the greatest challenge the U.S. economy has ever faced.