Credit crisis (VocabGrabber)

Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought.

When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.

Credit conditions began to slip again, and stock markets fell even further, skidding to their lowest levels in 12 years and slashing the share prices of blue-chip companies to something akin to penny stocks.

In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages.

In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages.

Polls showed that Mr. Obama’s election on Nov. 4 was partly the fruit of the economic crisis and the belief among many voters that he was more capable of handling the economy than Mr. McCain.

In early November, the European Central Bank and the Bank of England followed with sharp reductions of their own.

And turn sour they did, when home buyers had to leverage themselves to the hilt to make a purchase.

Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought.

After two weeks of declines on Wall Street marked by rumors of bank nationalization, the Obama administration came back with more details of their plans to perform "stress tests" on 19 of the country's largest banks, to see whether they had a large enough capital cushions to withstand further declines in the economy.

Any bank that fails the assessment would have six months to raise additional capital privately, or would have to take it from the government in the form of preferred shares that could be converted to common stock.

And the Treasury and Federal Reserve would expand a program aimed at financing consumer loans.

At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase.

As inflation virtually halted, economists began to worry about deflation, the vicious cycle of lower prices, lower wages and economic contraction.

On Sept. 18, Treasury Secretary Henry M. Paulson Jr. publicly announced a three-page, $700 billion proposal that would allow the government to buy toxic assets from the nation’s biggest banks, a move aimed at shoring up balance sheets and restoring confidence within the financial system.

Continued Volatility When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.

When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.

On Sept. 16, American International Group, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal.

Continued Volatility When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.

In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression.

Sales, Failures and Seizures In August, government officials began to become concerned as the stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply.

Lehman’s failure sent shock waves through the global banking system, as became increasingly clear in the following weeks.

And even as the United States began to execute its bailout plan, the tactics continued to shift, with the Treasury announcing that it would spend some of the funds to buy commercial paper, a vital form of short-term borrowing for businesses, in an effort to get credit flowing again.

In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression.

As the year went on, more banks found that securities they thought were safe were tainted with what came to be called toxic mortgages.

Sales, Failures and Seizures In August, government officials began to become concerned as the stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply.

As hundreds of billions in mortgage-related investments went bad, mighty investment banks that once ruled high finance have crumbled or reinvented themselves as humdrum commercial banks.

When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.

Trade levels skidded lower and lower as demand for goods fell worldwide, hurting big exporters like China, and countries began throwing up trade barriers as the downturn deepened.

Credit conditions began to slip again, and stock markets fell even further, skidding to their lowest levels in 12 years and slashing the share prices of blue-chip companies to something akin to penny stocks.

The Crisis Takes Hold The first shoe to drop was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market.

By late October, the Treasury had decided to use its $250 billion investment plan not only to increase banks’ capitalization but also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh.

Over the weekend that followed the bailout’s passage, the German government moved to guarantee all private savings accounts in the country, and bailouts were arranged for a large German lender and a major European financial company.