The credit crisis and its sequel, the mortgage meltdown, capped off the horrors of the financial crisis that filled 2008 and 2009. Like all good horror movies, the bad guys you thought were dead have a way of coming back. This Halloween, we'll take a look back in the year at the events that truly scared us.
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The Flash Crash
On May 6 of this year, many long time market watchers had a sickening moment of déjà vu as the Dow swung over 1,000 points in a matter of minutes. The crash people were remembering occurred in 1987, and the circuit breakers and other precautions taken since were supposed to prevent a repeat.
Now it looks like a combination of stub quotes and a sale of e-mini contracts by Waddell & Reed financial set off the crash. After that, stop-loss orders and other automatic procedures took over in pummeling the market. Unlike 1987, the recovery from the crash was fairly quick, despite the overall market pessimism over the eurozone. Once again, adjustments to the circuit breakers are supposed to prevent this from happening again. (Check out What Caused The Flash Crash? for more.)
Greece Is Burning
The debt crises in Greece also exploded in May, quite literally, as three bank workers were killed by fires lit by protestors. May 5 and 6 saw fires in the street as Greeks sought to stave off austerity measures by force. The Greek debt crisis was the trigger for a wider eurozone crisis as just about everyone but Germany was revealed to be cheating the rules for joining the European Union. This debt nightmare is far from over as country after country has been forced to re-evaluate their budgets and sell more and more bonds to cover current deficits. (Learn more about what happened in EU Economics? It's All Greek To Me!)
The Great Society
No doubt many will take offense at the idea that the Obama administrations resurrection of the Great Society initiative is something to fear. However, in financial terms, there could hardly be a worse time to introduce ambiguous and far-reaching social programs that will likely be costing taxpayers far into the future. Not only do the extra taxes and deficits needed to support these programs stifle economic activity, but the tax base itself is shrinking as unemployment has been high all year. So, the government is forced to issue more and more bonds to fund programs that, right now, America can't easily afford. (For more on the U.S. president, don't miss Obama's Scariest Financial Statements.)
The BP Oil Spill
Talk about a pure lose-lose situation. When an explosion rocked the Deepwater Horizon rig on April 20th, it killed and injured BP employees. Then oil began spilling into the ocean, affecting all the people and businesses on the gulf coast. Multiple attempts to cap the well and stop the leaks failed. Clean up costs mounted for BP even as the leak continued, endangering a dividend that many British retirees depend on.
In early September, the leak was finally stopped. The costs were already over $10 billion when the leak was stopped, and the final bill to BP is not expected to be known for at least several years as the long-term impact is still unknown. (For more information, read BP's Broken Window.)
The Bottom Line
Arguably, the Greek debt crisis was inevitable and - at least in some circles - expected. And the rebirth of the Great Society has, for better or worse, followed the path set out by a powerful democratic party. The flash crash and the BP oil spill caught the markets unaware and the BP oil spill in particular seemed to be a daily source of terrible news.
That said, like 2008 and 2009, 2010 was a bad year to be a homeowner. However, we've become so used to the idea of an underwater mortgage, bank foreclosures and MBS losses, that the scariest moments were unexpected events rather than the relentless grinding following the deleveraging of the housing bubble. (For related reading, take a look at Haunting Wall Street: The Halloween Terminology Of Investing.)
For the latest financial news, see Water Cooler Finance: Ghosts Of Economies Past.