This article was written during Wall Street’s crash and burn in the fall of 2008, but it is as relevant as ever, explaining the intricacies of how the banking industry, the Fed and Washington inflated the housing bubble and then watched it implode.
Everything you ever wanted to know about the biggest economic meltdown since the Great Depression but were afraid to ask.
By Arun Gupta. Illustrations By Frank Reynoso
Max Fraad Wolff consulted on and Michelle Fawcett contributed to this article. Design By Anna Gold. Color By Irina Ivanova. This article relied on many sources, including “The Subprime Debacle” by Karl Beitel. Monthly Review, May 2008.
From 1982 to 2000, the U.S. stock market went on the longestbull run ever, as share prices rose to dizzying heights. In the late 1990s, a combination of factors, which included the Federal Reserve lowering interest rates, created a huge price bubble in Internet stocks. A speculative bubble occurs when price far outstrips the fundamental worth of the asset. Bubbles have occurred in everything from real estate, stocks and railroads to tulips, beanie babies and comic books. As with all bubbles, it took more and more money to make a return*. This led to the Internet bubble popping in March 2000.
*For instance, if you purchased 100 shares of Apple at $10 a share and it rose to $20, it cost $1,000 to make $1,000 profit (a 100 percent return), but if the shares were $100 each and rose to $110, it would cost $10,000 to make $1,000 profit (a 10 percent return — and the loss potential would be much greater, too.
Many Americans joined the stock mania literally in the last days and lost considerable wealth, and some, such as Enron employees, lost their life savings. When the stock market bubble erupted, turbulence rippled through the larger economy, causing investment and corporate spending to sink and unemployment to rise. Then came the Sept. 11, 2001, attacks, generating a shock wave of fear and a drop in consumer spending. Burned by the stock market, many people shifted to home purchases as a more secure way to build wealth.