It's hard to overstate how much damage was done to the world's financial systems over the last 4 months. Major events of the last two years include:
July 2006 - Housing prices peak in US
July 2007 - Collapse of two Bear Sterns hedge funds invested in mortgage backed securities
October 2007 - Citigroup, Merrill Lynch, other banks reveal major losses on mortgage backed securities
March 2008 - Bear Sterns collapses, forced to merge with JP Morgan
August 2008 - International financial system appears to stabilize
September 2008 - Fannie Mae, Freddie Mac taken over by US Treasury, Lehman Brothers collapses, AIG taken over, world credit systems freeze
October 2008 - Treasury TARP program approved on second attempt
November 2008 - Citigroup nearly goes under, US stocks hit 11 year low, commodity prices decline 50-70% from mid-summer highs
December 2008 - Auto industry bailout approved, US Federal Reserve drops rates to a record low between 0-0.25%
Despite over $4 trillion pumped into the US banking system, and trillions more pumped into European and Asian banking systems, none of the standard counter-cyclical measures employed by the Federal Reserve have worked so far. As fast as the Fed supplies liquidity, liquidity is destroyed even faster as banks continue to write down investments. The problem is exacerbated by forced sales of virtually every asset class (US and international stocks, corporate and municipal bonds, preferred stock, commodities, securitized debt of any kind) by deleveraging hedge funds and investors in general. The value of US financial and real estate assets are down about $14 trillion since January 2008.
The stock market correction, which took US stocks down 12% through August 31st, turned into a full scale rout September through November, exceeding the 1987 stock market crash. Only 25 of 500 stocks in the S&P 500 delivered positive returns in 2008; 161 or a third declined 50% or more. Only 6 out of 1601 mutual funds delivered positive returns. Only Walmart and McDonalds delivered positive returns in the Dow Industrials, while Citigroup lost 77% General Motors lost 85%. For the year, the S&P 500 declined 37%, which was the worst result for stocks since the 41% decline of 1931. From the October 2007 peak to the November 2008 trough, US stocks declined 52%, exceeding the 49% loss of the 2000-2002 bear market. Even after the 20% rally of the last 5 week, US stocks remain 42% below last year's record.
Current state of the US and world economies
Business and consumer confidence remained buoyant through July 2007, turned lower by year end 2007 and utterly collapsed by October 2008. For consumers, a relentless slide in housing prices, losses in stock investments and a sharp increase in layoffs and the jobless rate took expectations to historic lows for the series. Businesses are slashing investment and hiring and scaling back production to keep inventories low. Expectations about forward conditions (the next 6-12 months) are equally pessimistic. The biggest problem is that the banks that were willing to lend on generous terms through 2006 are now not willing to lend at all. So net, US GDP growth should be negative through at least Q2 2009, and possibly through year end 2009. World GDP, which grew robustly over the last 5 years, will be flat or negative in 2009.