What We’ve Learned Five Years After the 2008 Crisis

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Five years ago this month the world’s financial markets endured one of their biggest crises ever. Lehman Brothers Holdings failed, igniting a firestorm. Within days the unthinkable occurred:

  • Insurance giant AIG and government mortgage agencies Freddie Mac and Fannie Mae were taken over by the federal government.
  • The storied investment house of Merrill Lynch was taken over by Bank of America in a private rescue.
  • The nation’s oldest money market fund, The Reserve Fund, “broke the buck” when its assets declined, causing a run on money market funds and forcing the federal government to temporarily insure money market fund assets.
  • The federal government bailed out General Motors and Chrysler.
  • Congress and the Treasury Department temporarily nationalized the nation’s leading banks by forcing them to accept capital from the $700 billion Troubled Asset Relief Program (TARP).

Throughout this period world stock markets gyrated wildly. The Dow Jones Industrial Average fell nearly 1,000 points one afternoon after Congress initially voted against the TARP program. Daily swings up or down of 400 to 500 points became common. On the whole the trend was down. From a high of 1565 in late 2007 the Standard & Poor’s 500 Stocks Index fell to the 1200 range in September 2008 and eventually bottomed out at 679 in March 2009.
Patient investors with diversified portfolios have learned since then that it was best to stick with their portfolios. Five years later the S&P 500 is in the high 1680s, well above its level five years ago this month and above its record level of late 2007. Despite all of the bad economic news since 2008 stocks and bonds have gradually recovered. Long-term investors have profited by not selling when things looked bleak.
Investors have also learned that predictions of the future are worthless. The common prediction at the time the TARP was initiated was that the government would lose a lot of money on the deal. Instead, the banks have paid back their loaned capital with interest, government holdings in AIG were sold at a profit, and it looks like the recovery of General Motors and Chrysler will lead to profitable paybacks as well. On the whole the Treasury has already recovered more than the $700 billion lent out through the TARP.