Opening a newspaper today, one finds a barrage of headlines announcing vague hopes that the government can save a battered economy, or that the stock market is showing signs of possible stabilization. Despite the hopeful rhetoric, these articles harbor undertones of a darker attitude. In light of the economic boom of the past decade, is the nation's economy really doing as badly as public opinion indicates? In short, yes. The collapse of America's lending and banking industries has spent shock waves through the economy, negatively impacting people and businesses at all levels. The government, however, has ignored the plight of the average American, focussing its assistance solely upon the restoration of large corporations.

The current state of the economy has reached critical levels. Although the federal government has not officially declared the economy in recession, consensus among financial experts is nearly unanimous; in the words of financial expert Darren Bagwell, "We're clearly in a recession now. I don't think there's much doubt about that" (Aaro). All of the key economic indicators point towards a contracting economy. The unemployment rate, which slowly decreases in periods of economic stability, has risen dramatically in recent years. Since January of 2007, the rate of unemployment has risen from 4.6 to 6.1 percent ("Labor Force"), a loss of over two million jobs (Aaro). To further exacerbate this effect, inflation has handily outpaced the increase in the average household salary. Combined, these publicized factors diminish consumer confidence, causing the stock market to plummet. Recently, market uncertainty and the House of Representatives' failure to pass a bailout plan caused the market to lose 780 points, the largest single day drop in history, surpassing even Black Monday in 1929 (Paradis). Large fluctuations in the stock market are often indicators of a serious recession (Aaro). Despite the lack of an official statement confirming the state of recession, comments by insiders reveal how weakened the economy has become. As far back as April 2008, Ben Bernanke, chairman of the Federal Reserve, warned that a "recession is possible" (Felsenthal). Although failing to officially pronounce the economy's contraction, his words are a dire warning shielded only by a thin glimmer of hope.

In sectors such as banking, unprecedented government action has been required to prevent collapse. Federal regulators have shut down or otherwise seized several of the nation's largest banks to prevent further damage. In late September, Washington Mutual, which controlled over $307 billion, was taken over by the federal government and quickly sold to a more stable bank to continue operations (Sidel). This collapse was the largest bank failure in United States history. However, this catastrophe has not been isolated; other national banks, including powerhouse Wachovia, have faced similar fates in recent months. After extended debate, Congress approved a corporate bailout plan with total payouts of over $700 billion in hopes of staving off further stumbles within the investment and banking realms. The repercussion of faltering banks are enormous, stretching from the corporate world down to the lives of individual taxpayers.

A turnaround this drastic, from the relative prosperity of just a few years ago to a period in which all sectors are in turmoil, begs the question: What happened? During the past decade, greed within the banking industry fostered the growth of the market for subprime mortgages. Traditional mortgages are given to borrowers who pose a low risk. As a result, they are given the lowest possible interest rates, which decreases the banks' profit margins on the mortgage. A stable economy fostered the desire for higher margin loans, which require more creative terms and riskier borrowers. According to Crouhy, subprime mortgages, or loans to people who have a somewhat questionable credit history, fit this requirement, for they "offer higher yields than standard mortgages." The advantages of these loans are twofold; banks receive greater profits, and more people find home-ownership to be a viable solution. In fact, subprime adjustable-rate mortgages are usually a good investment for borrowers, assuming that they are in a "market where home prices [keep] rising" (Crouhy). These adjustable interest rates have a dark side, though. In a slowing economy, once affordable loans can balloon out of control. Unfortunately for the millions saddled with these loans, some places are "projected to see home values drop by as much as 40 to 50%" (Bitner 176). Adjustable-rate loans to credit-poor consumers in a declining market is a recipe for disaster.

Compounding this problem is the use of financial products known as securities built from volatile loans. To further enhance profits, smaller loan issuers sell their loans to larger banks. These larger banks buy large quantities of somewhat risky high-profit loans and bundle them together into securities. The thinking goes that although a small fraction of a security's individual loans fails, the rest of the mortgages will continue paying high interest rates. Subprime securities are traded publicly as investments, so higher interest loans produce higher returns for investors. Many of these investors are larger banks who will take multiple securities with moderate risk and repackage them as new securities with less apparent risk, because they draw from an even larger pool of mortgages. This diversified and stratified portfolio maintains high growth rates through most economic conditions; even in moderately difficult times, a sufficiently few number of loans will fail to allow the security to break even. Problems arise when this basic tenant ceases to be fulfilled. If a crisis occurs and an unusually high number of loans default, the value of lower level securities, composed of just a few loans, plummets. This fall, in turn, cascades upward to bring down the higher level and seemingly more stable packages (Crouhy).

During the economic boom of the past decade, the conditions necessary for a large-scale collapse did not seem likely to exist. A collapse hinged solely on the borrowers' ability to pay back loans. Due to the increasing greed of the banks, many borrowers were stretched to the limits of their ability to pay; there was no room in their budgets for unexpected increases. A July 2008 cartoon by Frank Cammuso (Figure 1) succinctly illustrates how unexpected increases soon became a way of life. Abruptly and unexpectedly entering the scene is a domino labelled "energy," representing the energy crisis that began to plague the nation a couple of years ago. Rising energy costs left mortgage holders with less disposable income. Faced with the need to pay for their homes and pay to drive to work, many were unable to fulfill both needs, forcing them to make a difficult decision of whether to pay electricity bills or make mortgage payments. The rise of these costs forced many people into default on their loans, starting the chain reaction that led to the downfall of the housing market and eventually the banking system (Cammuso).

Congress's responses to the housing and credit crises have been as varied as the crises' sources. As growing number of homes were foreclosed upon and the availability of credit dried up, the government continued with its well established method of dealing with such problems. Following the lead of former Federal Reserve Chairman Alan Greenspan, the nation took a hands-off approach, trusting that the market, acting in its best interest, would sort itself out. The entire administration, both executive and legislative, believed that there would be inevitable ups and downs, but that the market would stabilize itself without extensive regulation. This ideal is increasingly showing its weaknesses, though. Looking back on his years at the head of the banking system, Greenspan now sees that it was a mistake to believe that "banks […] operating in their self-interest would be sufficient to protect their shareholders" (Crutsinger). By maintaining this laissez-faire attitude, Greenspan's actions led to rapidly increasing house prices, the flourishing of risky loans to unqualified borrowers, and the present state of the economy, described as a "once-in-a-century credit tsunami" (Crutsinger). The government's focus on free market forces allowed for the rapid development of unsustainable credit practices.

Since the rapid decline of the economy, the government has taken a more leading role in the regulation of the situation it helped to produce. During the surge in home foreclosures, the Senate and House of Representatives attempted to pass new regulations aimed at preventing the continuation of the abuses of recent years. The bill that sat before the houses was denounced as predatory, in that its principle aim was to almost punish the industry by forcing it to quickly change its ways (Bitner 160).

The bill proposed numerous ways to impose accountability on a wild market, forcing workers at all levels in the industry to act in "the borrower's best interest" instead of seeking maximum corporate profits or personal commission (Bitner 160). In a related measure, Congress authorized the $700 billion bailout plan designed to prevent the most foolish and unsound companies from facing the full brunt of the market. Greenspan applauds this plan as "adequate to serve the needs" of the country, although this view is heavily weighted towards large businesses, not individuals (Crutsinger). A hands-off government policy was a key catalyst in the formation of the credit problem, so the federal powers are asserting an active role. In aiming to support the welfare of both borrowers and lenders, though, it strongly favors the lenders.

Already one can see that the problems that created these interrelated credit, housing, and banking crises are widespread. Similarly, the solutions posed to solve them are equally diverse. Wider still is a lesser-considered face of the crisis: the victims. The withdrawal of credit has far-reaching effects on the economy, which directly changes the lives of all people, from the richest of the rich all the way down to the poorest of the poor.

The groups that most obviously feel the pain of these economic woes are the members of the lending industries. Subprime lenders especially saw their business dry up immediately. Bitner describes how this "entire segment of the lending industry has disappeared [with] the news get[ting] worse every day" (Bitner xi). What had been a blossoming industry saw itself completely destitute almost overnight. The subprime lenders are not the only lenders facing impending failure. Australian analyst Robert Marks remarks that while the effects on subprime lenders are nearly through, "at the other end of the supply chain the dominos continue to fall." These larger firms which traditionally deal with less risky loans and securities are only now entering the shadow of mass foreclosures. With a notable "lack of interbank lending," these larger firms are finding themselves without sufficient information and funds to carry out their lending duties (Marks). In a world frightened to lend, mortgage writing firms around the world are finding their jobs difficult, if not impossible, to carry out.

Other large industries, especially those invested heavily in subprime securities, are suffering at the hands of this crisis. Money from the huge government bailout is being distributed to industries far beyond the banking sector alone. Portions of the aid are going to "broker-dealers, insurance companies, car companies, and even foreign-owned financial institutions" (Newman). All of these industries have been hard hit the banking-caused recession. Brokers have seen their commissions drop due to the sudden contraction of consumer credit; if the industry is unable to close loans, brokers get no commission or paycheck. Insurance companies, especially those which offered insurance on investments, have seen the rapid fall of the stock market take its toll. Nervous consumers have amplified once tolerable risks for insurance bureaus, leaving difficult to assume risks. Automobile manufacturers are having a more difficult time selling vehicles in a climate in which consumers are being denied credit. In all sectors, large businesses are seeing the downward effects of recession, as confidence in the economy falters.

The effects on businesses, though widespread and damaging to the macroeconomy, are not the only problems that have arisen with this crisis. In great numbers, individuals, who will see none of the government's financial bailout, have had to bear the brunt of the credit crunch. While many economists see foreclosures as statistics, real people are losing their homes daily. With nowhere to turn, many people have turned to homeless shelters for the first time. Soon after the initial surge in home foreclosures, tent cities began appearing in cities all around the country. In Reno, Nevada, homeless shelters have been filled to capacity, forcing many to live in small, impromptu shelters in parking lots ("Growing"). Homelessness advocacy groups in Seattle describe "the most visible rise in homeless encampments in a generation" ("Growing"). The people in these camps are not chronically homeless; instead, most are newly unemployed due to recessionary layoffs or have recently lost their homes when mortgages defaulted. In economic times such as these, demand for shelters is perpetually on the rise as the government overlooks a vast segment of the population.

The secondary effects of the foreclosure crisis spread even deeper still. A withdrawal of credit has occurred in all sectors of the nation, not just home financing. Young Americans seeking a university education, for example, are finding the proposition of college more difficult to achieve. Student loans, known for being relatively easy to obtain and for having somewhat generous terms, are seeing an increase in "credit scores needed to secure student loans as well as higher interest rates on those loans" ("Subprime"). These new protocols could have a grave impact on the futures of these young people. Unless an education can be privately financed through independent scholarships, students may be deprived of an education because of the rising scrutiny of all credit applications.

Students are not the only segment of the population hurt. Property values for homeowners with good credit have plummeted, leaving people who can afford their loans stuck with more debt than equity. Many investors had tied their savings in mutual funds and other distributed-risk accounts. However, as the markets fell across the board, nearly all of these accounts lost vast percentages of their value. For some, this means a delay in a major purchase, but for others, the dream of retirement has vanished. Throughout it all, government aid for homeowners seem as elusive as its aid for hurricane-ravaged Mississippi, as shown in Mike Lane's striking political cartoon (Figure 2). Throughout the nation, the credit crunch and its byproducts have changed the way the world works.

The present-day financial crisis truly has damaged all facets of American society, not just the select few aided by the government. Built up by economic booms and simple greed, the financial industry created an unstable stack of dominos. With a slight push from rising energy costs, the system became unable to support itself. Mass foreclosures felled the largest of lenders, sending a ripple effect through the whole economy. In the end, this crisis has already had drastic effects on all segments of society, from the most powerful of corporations, to the lowliest of citizens, to the country's standing internationally, with no end or relief in sight.