The Banking Collapse of 2008

The current chaos in the banking and finance markets is scary stuff, but we have been here before. The bad news is the last great banking collapse resulted in the Great Depression and eleven years of misery.

In 1929, the good times in the United States came to an end. After years of tremendous personal financial wealth gains, the market corrected. This resulted in rumors of banking problems and a run on the banks that resulted in the collapse of the industry.

To say the change in fortunes was dramatic would be a minor understatement. We went from a period of great wealth to poverty for many. Even worse, it lasted for ten years from coast to coast.

How did we get out of the Great Depression? The government put many different social programs in place to create jobs. These programs certainly deserve credit, but things really did not turn around until the massive output needed for World War II.

Does all this sound a little familiar? It should. The only difference is the Great Depression was fueled by stock market gains, while we have seen housing market gains. We all hope, of course, that a World War is not necessary as well.

Lehman Brothers in bankruptcy. AIG, Freddie Mac and Fannie Mae saved by the government. Merrill Lynch going for a song to Bank of America. Washington Mutual nearly failing. Is there any doubt the banking industry is a nightmare.

Many have put faith in the fact only Lehmans actually went bankrupt. Well, this is a mistake. The others were only saved from bankruptcy by the government or a company, Bank of America, getting a great deal.

Given the clear similarities, why have we not sunk into the throws of a complete banking collapse and another depression? It might still happen, but one man stands in the way. Ben Bernanke of the Federal Reserve is really earning his salary.

The Federal Reserve was around during the first Great Depression, but in a much less powerful role. When things went to hell in a hand basket, it really had no serious part to play. Well, things have changed this time.

The Federal Reserve is the bank of last resort. It lends money to banks and keeps liquidity in the market. Well, it has been doing this and more. Combined with the government, it has pumped over 900 billion dollars into the market.

The current situation is unique. Banks are failing right and left, yet nobody says much. Why? The Fed is coming taking them over and selling them over the weekend when the news reporting is none existent. Pretty slick, eh?

Unfortunately, the Federal Reserve can only do so much. All indications are we are in the early stages of the banking collapse. The Fed will try to get us through it, but there is much still to be determined.

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