VOLATILITY ANNIVERSARY SERIES™
The 2008 Great Recession - 10 years later
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It all began in 2007 with a crisis in the U.S subprime mortgage market and developed into an international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008. Excessive risk-taking by banks such as Lehman helped to magnify the financial impact globally. Massive bail-outs of financial institutions and other pacifying monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was then followed by a global economic downturn, coined “The Great Recession.”
The VIX Volatility Index peaked to its highest level since its inception - 89.53 - at 10:05 AM on October 24th, 2008. The mean-reverting nature of the VIX was perhaps on its best display over the next few days and months. The VIX had retreated down 10% to 80.00 within 30 minutes of hitting its highest-ever peak. As soon as two trading days later, the VIX would retrace another 25%, followed by yet another 46% retreat closing at 47.73 a mere seven trading days later.
Although it is often misunderstood that the VIX is always negatively correlated to the S&P 500, the 2008 Financial Crisis displayed quite the opposite. The VIX hit its peak in October of 2008; the S&P 500, however, didn’t reach the base of its trough until six months later. At this time, the VIX was nowhere near 89.53, but back under 50. The market would take 5 ½ years to once again reach its high, which finally occurred in March of 2013. The VIX however, would hit its lows within two years, trading back into its pre-crash range only one-month into the S&P’s five-year recovery.
The crisis was the worst U.S. economic disaster since the Great Depression. In the United States, the stock market plummeted, wiping out nearly $8 trillion in value between 2007 and 2009. Unemployment climbed, peaking at 10% in October 2009. Americans lost $9.8 trillion in wealth as their home values plummeted and their retirement accounts were slashed. In all, the Great Recession led to a loss of more than $2 trillion in global economic growth, or a drop of nearly 4%, between the pre-recession peak in the second quarter of 2008 and the low hit in the first quarter of 2009.
Amid the crisis, the government seized control of the troubled mortgage giants as the housing market unraveled and the companies’ losses piled up. Taxpayers pumped billions into the companies, but over the past few years Fannie Mae and Freddie Mac, which buy mortgages from lenders and then package them into securities to sell to investors, have been spewing profits that feed into government coffers. Fannie Mae, for example, took $119.8 billion in taxpayer bailout money but has handed over $167.3 billion to the Treasury Department. The smaller Freddie Mac received $71.6 billion in bailout money and has turned over $112.4 billion in profits.
The U.S. economy has mostly recovered. In late August of 2018, the U.S. stock market set a record for the longest-running upswing in its history, replenishing the retirement accounts of workers who stayed invested through the most jarring period of market volatility to date. Home prices have also rebounded, pushing total housing wealth to top the levels seen in the pre-recession peak. Unemployment is also low, at 3.7% as of September.
Still, the recovery’s rising tide has not raised all the U.S. consumers’ boats in an equal fashion. Many workers have struggled to land jobs that paid as well as the positions they had before the recession. That shift, combined with the time spent out of work and other drops in productivity since the crisis, has led to a loss of about $70,000 in lifetime income for every American, according to an estimate from the Federal Reserve Bank of San Francisco. At the end of 2017, 4.4 million homeowners were underwater on their mortgage, meaning they owed more than their homes were worth, according to the real estate company Zillow.
The Great Recession Facts
• S&P 500 declined 38.5% in 2008 alone
• 7.4 trillion in lost stock market wealth
• $66,200 per U.S. household in lost wealth (on average)
• Employee sponsored retirement accounts declined 27% in 2008
• Adjustable rate mortgage delinquencies hit 30% by 2010
• 8.8 million jobs lost
• Unemployment reached 10% by October 2009
• 8 million home foreclosures
• 19.2 trillion global household wealth lost
• Home prices declined 40+%
Sources: Bloomberg Finance, Washington Post, Wall Street Journal, Forbes