Although the first big signs of trouble began to emerge last summer, 2008 was the year the financial crisis would go truly global, knocking the economies of the United States, Europe, and Japan into their first simultaneous recession since World War II.
In 2008, terms like "credit crunch," "fiscal stimulus," and the one that started it all -- "subprime" -- would become part of everyday language.
As early as January, U.S. authorities recognized the economy needed a health check. But President George W. Bush's words as he pushed for a fiscal stimulus package were still confident. "We can provide a shot in the arm to keep a fundamentally strong economy healthy, and it will help economic sectors that are going through adjustments, such as the housing market, from adversely affecting other parts of our economy,” Bush said.
Unfortunately for the United States, and for countries around the world, that housing market adjustment would indeed have startling adverse effects.
“The time of domination by one economy and one currency has been consigned to the past once and for all." -- Russian President Dmitry Medvedev
The crisis had its roots in the market's subprime section. Too many people had taken out home loans beyond what they could afford to pay back. When they began to default in large numbers, lenders began to collapse. Banks posted huge losses on complex securities linked to those subprime mortgages. This in turn led banks to become more reluctant about lending money to businesses and each other.
With borrowing difficult to get for business and individuals, the chill of recession was in the air. The question was how severe the storm would be, and how far it would blow from the United States.
By March, the subprime crisis had its first big casualty. One of Wall Street's biggest firms, Bear Stearns, was taken over by its rival, JP Morgan Chase, for a fraction of its previous value.
July was another peak month. It brought the demise of Indymac, one of the biggest U.S. mortgage lenders. It was also the month of $147-a-barrel oil prices and an all-time high -- at $1.60 -- for the euro.
And then came the events of September. U.S. Treasury Secretary Henry Paulson on September 7 announced the government rescue of two huge mortgage lenders, Fannie Mae and Freddie Mac, saying that the companies “are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in the financial markets."
The crisis quickly spread within the following days and weeks. On September 15, in the space of just one day, one of the world's biggest investment banks, Lehman Brothers, collapsed, and another, Merrill Lynch, was taken over by another bank.
The next day, the Federal Reserve announced a multibillion dollar emergency loan to rescue insurance giant AIG.
By the end of the month, two more investment banks – Goldman Sachs and Morgan Stanley -- had transformed into regular commercial banks, and a giant mortgage lender, Washington Mutual, was closed down.
Meanwhile, the first details were emerging of a $700-billion government plan to take over the bad debt at the heart of the crisis.
With hindsight, some say it was a mistake for U.S. authorities to allow Lehman Brothers to fail. The decision quickly set in motion a chain reaction of events that put the financial system, in the words of U.S. financier George Soros, into "cardiac arrest."
Lehman's failure led to the seizing up of the important market in "commercial paper" -- short-term debt issued by businesses to raise cash for expenses like payroll.
A huge amount of that debt issued by Lehman Brothers became worthless overnight, and money market funds stopped buying commercial paper.
Howard Davies, the director of the London School of Economics and a former financial regulator in the United Kingdom, said that the failure of Lehman Brothers provided a lesson in how the market has changed in recent years.
"In the past the doctrine had been that an investment bank -- unlike a commercial bank -- could fail and you would have to unwind its transactions and the shareholders would lose all their money, but nonetheless the market would carry on,” Davies said. “In fact, we discovered that Lehman Brothers might not have been too big to fail but it was too connected to fail, and created all kinds of ripple effects across the globe."
So far, Europe had been fairly smug about what seemed to be a crisis made in the U.S.A. But by end of September, the smirks disappeared as the crisis washed across the Atlantic.
A series of emergency responses began with the nationalization in Britain of mortgage lender Bradford and Bingley, and the bailout by Belgium, Luxembourg, and the Netherlands of banking and insurance group Fortis.
Most dramatically, Iceland's banking system collapsed in October, forcing it to seek help from the IMF.
Russia Points A Finger
The crisis was spilling over into emerging markets too. Investors were fleeing Russia and elsewhere for safer shores, and by October there was panic as Russian stocks went into freefall, prompting markets to close several times.
Russian Prime Minister Vladimir Putin blamed what he called "U.S. irresponsibility" for the crisis. And President Dmitry Medvedev pronounced the end of an era, saying that “the time of domination by one economy and one currency has been consigned to the past once and for all."
Fingers pointed to many culprits in this crisis: irresponsible borrowers; the Federal Reserve for keeping interest rates too low for too long; exotic, complex investments based on mortgages; credit rating agencies that gave top grades to those investments.
Whatever the causes, the economic crisis loomed ever larger in the U.S. presidential campaign, not least because it was clearly spilling over into sectors from banking to airlines to manufacturing, all of which cut thousands of jobs. By December, it was confirmed the U.S. economy had been in recession all year.
November also brought the biggest bank bailout yet -- that of Citigroup.
The list of countries asking for IMF help grew ever longer, as Hungary, Latvia, Ukraine, Belarus, and Pakistan joined Iceland in seeking emergency aid.
The Fed continued to take unprecedented actions. After deep rate cuts -- some coordinated with other central banks -- the Fed's key rate now stands practically at zero, effectively retiring it as a tool of monetary policy.
But the cuts so far have had a limited effect in boosting lending, prompting the Fed to adopt unconventional methods. Among them, programs to buy more than $2 trillion of short-term debt from companies; another $1.4 trillion in bank loan guarantees; and a $200-billion program in which the Fed lends for the first time to holders of investments backed by car loans, student loans, and credit cards.
By the end of the year, the potential cost of this massive U.S. government rescue effort -- so far -- was an estimated $8.5 trillion.
Trillions of dollars had been wiped off the value of stocks worldwide. There were worries about the possible collapse of the U.S. auto industry. Oil was at under $50 a barrel -- less than a third of its value in July. State intervention was back in vogue in a big way.
There were questions, too. Was it right for governments to try to borrow and spend their way out of the problem, passing a colossal debt burden onto future generations? To some ears, the borrow-and-spend route out of recession sounds a lot like the original cause.
RFE/RL looks back at the stories that shaped 2008. More