XXVII.

The Early 21st Century

By the end of the 20th century the Cold War had ended, and the United States was riding a wave of unparalleled economic prosperity. But Americans learned at the dawn of the 21st century that they were not immune to the dangers posed by a volatile and turbulent world.

On September 11, 2001, terrorists carried out a devastating attack on the World Trade Center in New York City and the Pentagon in Washington, D.C. It was the first enemy action on American soil since the Japanese attacked Pearl Harbor in 1941.

The country also faced an economic recession beginning in 2001 in which more than a million jobs were lost. The recession reminded the country that economic good times were not guaranteed to last forever. While new realities spawned new fears, they also revealed reserves of resilience and strength in the national character. Faced with unexpected challenges, a resourceful and increasingly diverse country showed the world that it could not be easily demoralized.

A.

An Increasingly Diverse Population

The United States had a larger, more diverse population than ever as the 21st century began. According to the 2000 census, the population grew to more than 281 million people during the 1990s, an increase of 32.7 million since the 1990 census. Hispanic Americans fueled much of the population increase. The fastest growing minority group in the United States, the Hispanic population grew from 22.4 million to 35.3 million, a 58 percent increase, from 1990 to 2000. The Asian American population grew by 48 percent in the 1990s. The census also showed that, for the first time since the early 1930s, one out of every ten Americans was foreign-born. The country was getting older as well. The median age in the United States rose to 35.3 years, higher than ever. The fastest growing age group was a segment of the so-called “baby-boom” generation—people between 45 and 54.

Most of the population growth took place in the West and South in cities such as Denver, Colorado, and Atlanta, Georgia. Big cities in the North and East such as Philadelphia, Pennsylvania, and Detroit, Michigan, lost population in the 1990s. The nation’s midsection also emptied out. Sixty percent of the counties in the Great Plains states (Texas, Oklahoma, Iowa, Nebraska, Kansas, Minnesota, and North and South Dakota) lost people. Nearly 2,300,000 sq km (900,000 sq mi) in this region met the definition of frontier: land populated by six or less people per square mile (2.3 people per square kilometer).

The American family also underwent dramatic changes. Census data revealed that for the first time, married couples with children represented less than a quarter of all U.S. households (23.5 percent, down from 38.8 percent in 1970). The number of single mothers, single fathers, and unmarried couples grew sharply. However, the decline in the number of so-called nuclear families—two adults and their children—did not necessarily signal a breakdown in traditional families. Many married couples were simply waiting longer to have children. And more couples were living longer after their children left home. Two troubling trends, divorce and out-of-wedlock births, slowed their growth in the 1990s.

B.

The Bush Administration

As President Clinton’s second term came to an end, the country geared up for the 2000 presidential election. The main candidates were Clinton’s vice president, Al Gore, and Texas governor George W. Bush, the son of former president George Herbert Walker Bush. A Democrat, Gore stressed protecting the environment and improving education. Bush, the Republican candidate, campaigned as a “compassionate conservative,” advocating a tax cut and conservative social policies.

The resulting vote was like no other in U.S. history. For five weeks after the election, the outcome of the race between Bush and Gore remained undecided. The critical state was Florida, where Bush led by just a few hundred votes. A bitter legal dispute arose over the recounting of some ballots in that state. After a tangled series of court hearings and recounts in some areas of the state, the U.S. Supreme Court ruled 5 to 4 that the counting should end. The decision effectively awarded Florida’s electoral votes and the election to Bush. Although Gore won the nation’s overall popular vote by more than 500,000 votes out of 105 million cast, Bush captured 271 electoral votes to Gore’s 266, and thus the presidency. The extraordinary closeness of the election reflected, at least to some extent, the public’s doubts about whether either man was prepared to be president. It also showed that the country remained deeply divided over which political party was best able to address its problems. See Disputed Presidential Election of 2000.

Once in office Bush focused on tax cuts, education reform, and an expanded role for church-based charities in running social programs. In 2001 Congress approved Bush’s $1.35-trillion tax cut, which took effect over a ten-year period, lowered income tax rates for all taxpayers, and included a small refund to many taxpayers. In 2002 Bush signed into law an education bill that established, among other things, performance standards for public schools. A second round of tax cuts in 2003 provided benefits for stock market investors by lowering the tax rate paid on dividends. The cuts also reduced the estate tax and eliminated it entirely by 2010.

C.

Terrorist Attacks on the United States

American life changed dramatically on the morning of September 11, 2001. Terrorists hijacked four commercial jetliners, crashing two into the World Trade Center towers in New York City, which collapsed into smoldering rubble. Another hit the Pentagon in Arlington, Virginia, while the fourth plane crashed in rural Pennsylvania after what was believed to be a passenger uprising against the hijackers. About 3,000 people died in the attacks. See also September 11 Attacks.

The government shut down all air traffic for two days as fighter jets patrolled the skies. National Guard troops were deployed on the streets in New York City and Washington, D.C. The major stock exchanges were closed.

The event traumatized the nation. Most Americans saw their country as virtually unassailable as the 21st century began. With the Cold War over, America’s status as the world’s lone superpower seemed secure. But as millions watched the catastrophe unfold on television, it was clear that the country was vulnerable in ways that most people had not imagined.

After the initial shock, the country mobilized. Volunteers flooded blood banks and military recruiting stations. Millions of dollars were raised for the families of victims. A new patriotic sentiment surfaced as sales of American flags surged. Many people spoke of simplifying their lives and of spending more time with family and friends.

The U.S. government quickly identified the hijackers as members of al-Qaeda, an organization that, according to U.S. officials, connected and coordinated fundamentalist Islamic terrorist groups around the world. The government also believed that al-Qaeda was responsible for other attacks, including the bombings of U.S. embassies in Tanzania and Kenya in 1998 and the attack on the Navy ship U.S.S. Cole in Yemen in 2000. Its leader, a wealthy Saudi businessman named Osama bin Laden, had pledged jihad, or holy war, against the United States for its activities in the Middle East. The group made its headquarters in Afghanistan, where it was supported by the country’s rulers, an Islamic fundamentalist movement known as the Taliban.

Instead of launching an immediate attack, Bush spent the first days following the terrorist attacks consulting with military leaders and assembling a coalition of nations to fight terrorism. The coalition included countries in the North Atlantic Treaty Organization (NATO) alliance, such as Britain.

Fears rose again in early October when a powdered form of the bacterium known as anthrax began to appear in letters in some places around the country. Anthrax lives in the soil and is most often found in grass-eating animals such as cattle. It forms hard-to-kill spores that, when ingested, can cause serious and sometimes fatal infections. Over the next few weeks, anthrax killed five people in Florida, New York, Connecticut, and Washington, D.C. It also forced the temporary closure of two congressional office buildings. At first some investigators thought that the outbreak was another form of attack by al-Qaeda. As the investigation progressed, however, some came to believe that someone inside the United States was responsible.

In early October the United States went to war, bombing al-Qaeda training camps and missile installations in Afghanistan. Within a few weeks, U.S. marines joined with Afghan opposition groups to topple the Taliban. The U.S. forces killed or captured many al-Qaeda fighters, but bin Laden remained at large.

On the home front, President Bush signed the Patriot Act in 2001 to give the government expanded powers to monitor terrorist suspects. Some critics, however, said the new law represented an infringement on civil liberties. Bush also signed a law in 2002 that created a new executive department, the Department of Homeland Security (DHS). The department’s mission was to protect the United States against terrorist attacks, reduce the country’s vulnerability to terrorism, and aid recovery in case of an attack. The DHS combined dozens of federal agencies into one department, the largest government reorganization since the Department of Defense was created in 1947. See also Civil Rights and Civil Liberties.

In 2003 a congressional inquiry concluded in an 858-page report that the U.S. intelligence community “failed to fully capitalize on available, and potentially important, information” that could have helped prevent the September 11 attacks. The inquiry found that U.S. intelligence agencies failed to share information with each other and failed to take action based on the information they did have. Specifically, the report cited the Central Intelligence Agency (CIA) for missing numerous opportunities to notify the Federal Bureau of Investigation (FBI) that two men linked to al-Qaeda could be in the United States. The two men were among the future hijackers, and prior to September 11 had contact with an FBI informant in San Diego, California. But because the FBI was unaware of their al-Qaeda link, the bureau did not investigate them, missing what the congressional probe called the “best chance to unravel the Sept. 11 plot.” Furthermore, the report found, the CIA failed to put the two men on a watchlist used by the State Department, the Immigration and Naturalization Service, and the Customs Service to deny individuals entry into the United States.

The inquiry also found that FBI headquarters failed to heed warnings from its Phoenix office about terrorist suspects seeking to enroll in flight training schools or to act properly on a request from its Minneapolis office to conduct a search of an alleged conspirator in the terrorist attacks. Prepared by a joint committee of the House and Senate Intelligence committees, the report disputed an FBI claim that none of the hijackers had contacted any “known terrorist sympathizers,” finding instead that five hijackers had contact with 14 persons who had been investigated by the FBI for possible links to terrorism. The intelligence community was aware as early as 1994 that terrorists might use aircraft in an attack and knew as early as 1998 that bin Laden was planning an attack within the United States, the report concluded.

In July 2004 an independent, bipartisan commission formally known as the National Commission on Terrorist Attacks Upon the United States issued its final report after a nearly two-year investigation into the September 11 attacks. The commission, chaired by former New Jersey governor Thomas H. Kean, found that neither the administration of President Bill Clinton, nor the Bush administration, prior to September 11, had grasped the gravity of the threat posed by al-Qaeda. The report said that “none of the measures adopted by the U.S. government from 1998 to 2001 disturbed or even delayed the progress of the al-Qaeda plot. Across the government, there were failures of imagination, policy, capabilities, and management.” The commission said its purpose was not to cast blame, but to make recommendations for improving U.S. counterterrorist efforts, and it put forward several proposals to unify U.S. intelligence agencies and place them under a national intelligence director. Congress approved the creation of the office of a national intelligence director in January 2005.

D.

War with Iraq

After the United States toppled the Taliban in Afghanistan, the Bush administration turned its attention to Iraq. Although a U.S.-led coalition had defeated Iraq in the Persian Gulf War in 1991, Iraq’s leader, Saddam Hussein, remained in power. After that war ended, the United Nations (UN) ordered Iraq to destroy its biological and chemical weapons. Weapons inspectors were sent to Iraq to monitor its disarmament. However, in 1998 Iraq announced that it would no longer cooperate with the UN, and UN weapons inspectors left the country.

In 2002 the Bush administration put a renewed focus on Iraq as part of its war on terrorism. It claimed that Iraq supported terrorist organizations and still had an arsenal of banned weapons. The United States pressed the UN to force Iraq to allow weapons inspectors back into the country. In October the U.S. Congress passed a resolution authorizing the president to use military force against Iraq if Iraq did not cooperate with the UN. The next month the UN passed a resolution cosponsored by the United States and Britain ordering the immediate return of weapons inspectors to Iraq and threatening “serious consequences” if Iraq did not disarm. Iraq agreed to comply with the resolution, and inspectors began working in Iraq that same month.

In early 2003 the United States and Britain claimed that Iraq was not cooperating with UN weapons inspectors, and they sought UN authorization of force against Iraq. However, some countries, including France, Germany, Russia, and China, wanted to give the inspections more time to proceed and opposed military action. After weeks of diplomatic wrangling, the United States decided to forgo UN approval and pursue military action against Iraq with a coalition of willing countries.

In March 2003 U.S.-led forces invaded Iraq. By mid-April they had captured the capital city of Baghdād and other major population centers and overthrown the regime of Saddam Hussein. In May President Bush declared that major combat operations in Iraq had ended and that an ally of al-Qaeda had been defeated. However, in the months that followed more U.S. troops were killed by guerrilla insurgents than during the invasion itself. In September Bush conceded that there was no evidence proving an al-Qaeda link to the regime of Saddam Hussein. Unrest continued in Iraq and even the capture and arrest of Saddam Hussein in December 2003 failed to end it. The insurgency was concentrated mainly among Sunni Muslims and a segment of Shia Muslims opposed to the U.S. occupation. See also U.S.-Iraq War.

The United States appointed a 25-member Iraqi Governing Council, consisting of the major ethnic and religious groups in Iraq, but the council’s authority was subordinate to that of the U.S. administrator in Iraq, L. Paul Bremer III. In March 2004 the council approved an interim constitution, although the 12 Shia Muslim members of the council objected to some of the constitution’s provisions. The constitution guaranteed a broad array of democratic rights, including rights for women and the Kurdish minority, and called for elections for a national assembly by January 1, 2005. The Bush administration transferred sovereignty to an interim Iraqi government at the end of June 2004, but it maintained about 130,000 troops in Iraq and imposed a number of orders that introduced privatization to Iraq’s previously state-run economy.

In the meantime the hunt for Iraq’s alleged weapons of mass destruction proved fruitless. In October 2003 a team of U.S. weapons inspectors reported that it had found no weapons of mass destruction. In January 2004 the head of the group, David Kay, resigned and told Congress that “we were all wrong, probably” about the existence of such weapons. Kay urged an independent inquiry into the failure of U.S. intelligence. Kay said the group not only could not find weapons of mass destruction but more importantly could not discover any of the facilities needed to produce such weapons on a large scale. A final report concluded that Hussein had ordered the destruction of biological and chemical weapons and had discontinued a nuclear weapons program but tried to keep these facts secret, fearing an attack by Iran. The two countries had fought a nearly eight-year-long war (see Iran-Iraq War).

In July 2004 the bipartisan commission that investigated the September 11 attacks also concluded that there had been no collaborative relationship between the Hussein regime and al-Qaeda. Despite the undermining of the two principal reasons for invading Iraq, the Bush administration maintained that the toppling of the Hussein regime had nevertheless made the region more stable and more open to democracy.

E.

The Faltering Economy

After nearly a decade of unprecedented expansion during the 1990s, the American economy began to show signs of a slump at the beginning of the 21st century. In 2000 the so-called dot-com bubble—the speculative investment in companies that sprouted up to take advantage of the Internet—burst. Analysts cited many reasons for the failure of these companies. Among them was that investors overestimated the extent to which consumers were willing to buy goods and services online. When venture capitalists—the people and companies that provide money to start-up businesses—became reluctant to invest new funds, the collapse began.

As many Internet companies went out of business, the stock prices of once high-flying companies such as Cisco Systems, Inc., and Lucent Technologies began to plummet. Other large companies, such as Microsoft Corporation and AOL Time Warner, Inc. (present-day Time Warner Inc.), announced that they would not meet projected profits. And just as high-technology stocks fueled the market’s rise, they dragged the market down. Both the Dow Jones Industrial Average and The Nasdaq Stock Market ended 2000 with a loss.

Soon the rest of the economy started to weaken. The National Bureau of Economic Research, a respected group of economists, estimated that the U.S. economy actually stopped growing in March 2001. Manufacturing and employment began to decline. The big automobile companies shut down plants and laid off thousands of workers. As businesspeople traveled less, airlines began cutting back. By the end of 2001, corporate profits had suffered one of their steepest drops in decades.

Many economists believe that the terrorist attacks of September 11, 2001, made the country’s slumping economy even worse. After remaining closed for several days after the terrorist attacks, the stock market suffered a record plunge when it reopened, with anxious investors selling off their holdings. Companies continued to trim workers, accelerating a downsizing that would total more than 1 million jobs by the end of 2001. Unemployment reached 8.3 million in December 2001, the highest in seven years.

The federal government tried to cushion the economic blows. Within two weeks of the terrorist attacks, Congress approved $15 billion in aid for the devastated airline industry. But with billions of additional dollars earmarked for defense spending and domestic security in the wake of September 11, the government only had a limited ability to cope with the faltering economy.

As 2002 began, however, the stock market rebounded strongly, and the pace of corporate layoffs slowed. Interest rate cuts by the Federal Reserve brought interest rates to record lows and helped some sectors of the economy. Studies showed that even after the terrorist attacks, American consumers continued to buy homes and cars in record numbers.

In 2003 the major stock indexes recorded healthy gains, and other economic indicators were positive. The recovery failed to replace the estimated 2.4 million jobs lost during the downturn, however, and some economists characterized it as a “jobless recovery.” Some corporations announced that they were hiring workers overseas to replace workers in the United States, a practice known as outsourcing. As 2005 began, concerns over inflation, motivated in part by a rise in petroleum prices, led the Federal Reserve to begin raising interest rates at a faster pace than previously anticipated.

F.

Presidential Election Year

The year 2004 began with the Democratic Party’s Iowa caucus in January, the kickoff for the party’s presidential nomination campaign in a presidential election year. By March Senator John F. Kerry of Massachusetts had won enough delegates in the caucuses and primaries to secure the nomination at the party’s convention in June. President Bush ran unopposed in the Republican primaries and was nominated at his party’s convention in New York City in August.

In the November elections, Bush defeated Kerry, sweeping the South and the key swing state of Ohio to win both the electoral college tally and the popular vote. Kerry won the Northeast, the West Coast, and a number of Midwestern states.

Claiming a popular mandate from the election, Bush began his second term by calling for a sweeping overhaul of Social Security. His plan to replace guaranteed Social Security benefits with private accounts invested in the stock market for younger workers met with resistance, however.

G.

Bush’s Second Term

The failure of Bush’s Social Security proposal seemed to set the stage for a series of mishaps for the Bush administration that resulted in some of the lowest approval ratings for the president since his election in 2000. Chief among these was the federal government’s delayed response to Hurricane Katrina, an August 2005 disaster that left tens of thousands of New Orleans residents, mostly poor and African American, stranded in the flooded city. It was the costliest natural disaster in U.S. history. A lobbying scandal involving Republican members of Congress, a decision to lease some U.S. port operations to a company based in the United Arab Emirates, and continued disorder in Iraq also contributed to popular disapproval.

Nevertheless, Bush’s second term gave him an historic opportunity to realign the Supreme Court in a more conservative direction. With the death of Chief Justice William Rehnquist and the retirement of Justice Sandra Day O’Connor, Bush succeeded in winning the Senate confirmation of two conservative jurists, John Glover Roberts, Jr., who succeeded Rehnquist as chief justice, and Samuel A. Alito, Jr., who succeeded O’Connor. With Justice Anthony Kennedy often filling the role of a swing voter and with some uncertainty about the judicial philosophies of the new appointees, however, it was unclear if Bush’s new appointments would lead to the overturning of significant precedents, such as Roe v. Wade.

The extent of presidential power in relation to the U.S. system of checks and balances spurred controversy during Bush’s second term. Throughout his prosecution of the wars in Afghanistan and Iraq, Bush claimed that he had wide latitude as commander in chief to protect national security. Those claims were the basis for denying Geneva Convention protections to prisoners held at Guantánamo Bay, Cuba. In 2006 Bush claimed that he had the authority as commander in chief and under the congressional resolution that authorized military force in Afghanistan to order the National Security Agency to eavesdrop on the overseas communications of U.S. citizens and nationals. The secret program, begun after the September 2001 terrorist attacks, was disclosed by a 2006 report in the New York Times. Some congressional critics said the 1978 Foreign Intelligence Surveillance Act required judicial review of electronic eavesdropping in such cases, making the program illegal. See also Surveillance, Electronic; Guantánamo Scandal.

Bush’s assertions of sweeping presidential power were rejected by several Supreme Court decisions, particularly Hamdan v. Rumsfeld (2006), which upheld the Geneva Convention’s protections and struck down the administration’s plans to try prisoners held at Guantánamo before special military tribunals. The Republican-controlled U.S. Congress, however, addressed the Hamdan decision by passing the Military Commissions Act of 2006, which gave Bush administration officials immunity from prosecution for torture or inhuman treatment of detainees and suspended habeas corpus for anyone declared an illegal enemy combatant. Bush also frequently issued signing statements in which he asserted a presidential prerogative to ignore provisions in legislation passed by Congress if he deemed the provisions infringed on his alleged powers as commander-in-chief. See also Civil Rights and Civil Liberties.

As the midterm elections approached, Republicans were fearful that the president’s low popularity ratings could lead to a Democratic takeover of one or both houses of Congress. But the Democratic Party appeared to be disunited, particularly over the Iraq war, and uncertain as to how to take advantage of the president’s unexpected setbacks. In the meantime the U.S. economy showed considerable resilience, having recovered all the jobs lost during the recession of 2000. Despite economic growth, however, the United States continued to lose jobs in the manufacturing sector, and the two major automakers, General Motors Corporation and Ford Motor Company, announced plans for massive layoffs as their market shares dwindled.

Republican fears were validated by the results of the 2006 midterm elections, which saw Democrats gain control of both houses of Congress. The Democrats also took six state houses from the Republicans, giving them a majority of the country’s governorships. President Bush called the election results a “thumping,” and the day after the election he asked for and received the resignation of Secretary of Defense Donald Rumsfeld, the architect of the Iraq war planning. Polls showed that voters overwhelmingly disapproved of Bush’s handling of the war. The congressional leadership of the Democratic Party resisted calls from the left wing of the party for Bush’s impeachment but pledged to hold hearings and investigations into the prewar intelligence that led to the war, the administration’s handling of the war, including allegations of torture and prisoner abuse, and the way in which Iraq war funds had been spent.

As 2007 progressed Bush’s handling of the Iraq war continued to come under intense criticism, particularly after Bush largely ignored the recommendations of the bipartisan Iraq Study Group. The conviction of Vice President Dick Cheney’s chief of staff in the Valerie Plame Wilson affair, and the controversial firing of eight U.S. attorneys also distracted the Bush administration from pursuing its second-term agenda.

The highly regarded Iraq Study Group, made up of leading foreign policy experts from both parties, had issued its final report in December 2006 and made 79 recommendations for how to wind down the war and bring home American troops by 2008. Included among the recommendations was a call for U.S. negotiations with Iran and Syria and a renewal of the Israeli-Palestinian peace process with the aim of achieving a region-wide peace settlement in the Middle East. In a January 2007 nationally televised address, however, President Bush instead called for an additional 20,000 troops to be sent to Iraq. The Democratic-controlled Congress characterized the proposed “troop surge” as an escalation and for the first time passed legislation that called for a definite timetable for a U.S. troop withdrawal. A number of Republican members of Congress began to take up the troop withdrawal position, which President Bush characterized as “tying the hands” of U.S. military commanders in Iraq. Bush vowed to veto any legislation with a troop withdrawal deadline.

Meanwhile, the Bush administration was distracted by the conviction in March of I. Lewis “Scooter” Libby, Vice President Richard Cheney’s former chief of staff, for perjury and obstruction of justice in the investigation of who leaked the identity of covert Central Intelligence Agency (CIA) agent Valerie Plame Wilson. In his concluding remarks to the jury, the U.S. prosecutor said that Cheney himself was “under a cloud” for his role in the affair, and many political observers believed that Cheney’s once-prominent role in the administration was being sidelined. The same month congressional investigations into the firing of eight federal prosecutors cast a cloud over Attorney General Alberto Gonzales, who later resigned.

H.

The 2008 Presidential Campaign and Financial Crisis

H.1.

The Primary Campaigns

President Bush’s lame-duck status and the Democrats’ narrow control of Congress made it increasingly apparent that little would be accomplished domestically during Bush’s last years in office. The Democrats lacked enough votes to override presidential vetoes of their legislation, and Bush lacked enough Republican votes in Congress to enact his own program. As a result the race for the presidency in 2008 got off to an early start, and it promised to be the most expensive election in U.S. history. By April 2007 six declared Democratic candidates had raised $78 million, and five Republican candidates had raised $53 million, for a combined total of $131 million, with many more months of fundraising to go. Among the leading Democratic contenders were senators Hillary Rodham Clinton and Barack Obama and former vice-presidential candidate John Edwards. Among the leading Republicans were former governor of Massachusetts Mitt Romney, former New York City mayor Rudy Giuliani, and Senator John McCain.

They were vying for leadership of a country that reached a population of 300 million in 2006. They were contending over a number of issues, ranging from the ongoing wars in Afghanistan and Iraq to global warming, health insurance, immigration, nuclear weapons proliferation, and the health of the U.S. economy.

By March 2008 the field of candidates had narrowed to Clinton and Obama among the Democrats and McCain, who became the presumptive Republican nominee after winning enough delegates in the Republican primaries and caucuses to secure the nomination at the Republican convention in September. The range of issues appeared to narrow as well as polls showed voters increasingly focused on two issues: the state of the economy and the U.S.-Iraq War.

With McCain assured of the Republican nomination, the nation’s attention focused on the intra-Democratic battle between Clinton and Obama. The final round of primary voting gave Obama enough delegates to clinch the nomination, and he was formally nominated at the Democratic Convention in Denver, Colorado, in August. Obama selected Senator Joe Biden of Delaware as his vice-presidential candidate. In September, McCain was formally nominated at the Republican Convention in Minneapolis, Minnesota, where he selected Alaska governor Sarah Palin as his vice-presidential running mate.

H.2.

The Financial Crisis

As 2008 began the new chairman of the Federal Reserve, Ben S. Bernanke, warned that the U.S. economy appeared to be headed for a recession. A number of factors contributed to the economy’s growing malaise, including a decline in housing prices, a sharp increase in oil prices, a growing number of housing foreclosures and personal bankruptcies, a diminishing savings rate, rising budget deficits, the growth of income inequality, and a crisis in financial markets that led the Federal Reserve to offer a $200-billion loan program to investment banks to offset their losses in the mortgage market. See also Banking.

For several years Americans had, on average, stopped saving money. Some economists became alarmed when the personal savings rate in the United States reached negative territory—that is, Americans on the whole were spending more money than they earned. Many observers attributed the negative savings rate to the steady increases in housing prices. Americans appeared to be banking on the value of their home for their retirement, rather than setting aside money in savings accounts. Meanwhile, other observers were warning that the housing market was a bubble that would eventually burst, and in 2007 it did, as home prices declined nationwide by 8.9 percent, one of the sharpest drops in U.S. history. By 2008, 1 in 7 American households owed more on their mortgages than their properties were worth.

A rise in housing foreclosures added to the gloomy picture. Defaults on home mortgages reached an all-time high in September 2007. Particularly hard-hit were people who had taken out adjustable-rate mortgages, arrangements that enabled them to pay monthly mortgages at a relatively low interest rate for the first few years of the mortgage. But after the rates rose, many of these homeowners could no longer afford to make their monthly payments. Many of the foreclosures affected people who received so-called subprime mortgages—that is, loans made to people whose credit ratings or income usually disqualify them for a home purchase loan. By the second quarter of 2008, a record 1.2 million homes were in foreclosure. A report by the U.S. Congress estimated that as many as 2 million families with subprime mortgages would lose their homes due to their inability to meet rising mortgage payments.

Further complicating the growing housing crisis was the existence of new financial instruments known as derivatives, along with mortgage securities or bonds, connected to the secondary mortgage market. Beginning in the 1970s banks began selling mortgages to other lenders as a way of raising cash, abandoning the long-standing practice of holding on to a mortgage until it was paid off while using the property as collateral. As this trend of pooling mortgages into securities continued, banks began to create new financial instruments in the 1990s known as collateralized debt obligations (CDOs), a type of mortgage security. Many of these CDOs mixed together mortgages that represented different levels of risks from low-risk to high-risk subprime mortgages. By one estimate the amount of subprime mortgages contained in these mortgage securities increased from $56 billion in 2000 to $508 billion in 2005, when mortgage borrowing reached its peak.

When the housing bubble burst and home prices started falling, financial institutions were in the position of not knowing the real value of the mortgage securities they held. In March 2008 the Federal Reserve announced a $200-billion loan program for about 20 large investment banks to reassure investors worried about losses in the mortgage market. The Fed also extended an additional $30 billion for J. P. Morgan Chase & Co. to acquire a leading investment bank known as Bear Stearns, which was threatened with bankruptcy due to losses in the mortgage market.

The financial crisis came to a head in September 2008, right in the midst of the presidential campaign. First, the federal government placed the mortgage lending institutions known as Fannie Mae and Freddie Mac in a “conservatorship,” which basically meant that they would file for bankruptcy reorganization under government protection. Then, in mid-September, the long-standing investment bank Lehman Brothers filed for bankruptcy, citing overexposure to bad mortgage finance and real estate investments. The same day the Bank of America Corporation announced that it was acquiring prominent Wall Street firm Merrill Lynch.

Before the month was over, the Federal Reserve, in an unprecedented intervention in the private sector, acquired an 80 percent stake in the world’s largest insurance firm, American International Group (A.I.G.), for $85 billion; the nation’s largest savings and loan institution, Washington Mutual, was seized by federal regulators and then sold to J. P. Morgan Chase & Co. in the largest bank failure in U.S. history; and the banking operations of the Wachovia Corporation went on the block, leaving the country with three major banks controlling 30 percent of all deposits. Topping it all off, when the U.S. Congress balked at passage of a $700-billion bailout proposal for the nation’s financial institutions, the stock market’s Dow Jones Industrial Average saw its largest single-day point drop in history, declining by 778 points as investors lost trillions of dollars in stock value.

By October it was being called the worst financial crisis since the Great Depression. Because financial institutions and firms around the world had invested in U.S. mortgage securities and other damaged financial instruments known as derivatives, the crisis became global and involved the central banks of other countries, especially those of the United Kingdom, France, Germany, and Spain. With so many unknowns about the extent of the crisis, lending institutions stopped lending, creating a credit crisis that promised to dry up loans for both businesses and consumers. To address this credit crisis, the U.S. Department of the Treasury and the Federal Reserve persuaded the U.S. Congress to pass the $700-billion bailout, or rescue, package, granting unprecedented powers to the secretary of the treasury, Henry Paulson. Among these powers was the virtually sole discretion to spend the money as he saw fit, including to aid foreign banks, although some oversight was to be provided by Congress and by regulators.

Haltingly at first but then with gathering speed, the Treasury Department and the Federal Reserve used their new powers to take a number of other extraordinary measures. Tapping into $250 billion from the rescue package, the Treasury purchased dividend-paying, preferred shares in at least eight of the nation’s largest banks. An additional $125 billion was allocated for thousands of midsize and small banks. By purchasing a stake in these institutions, rather than just buying up their troubled assets as the government had originally planned, the bailout held out the prospect that taxpayers might eventually recover some of the investment. However, the share-buying plan fell short of nationalization because the government held nonvoting shares in the banks, meaning that it had no say in their management. See also Banking.

Other measures included a federal government guarantee of new bank debt over a three-year period and a mandate for the Federal Deposit Insurance Corporation (FDIC) to cover all of the deposits of small businesses and to insure each individual depositor’s accounts up to $250,000 through the period ending in December 2009. The FDIC also extended temporary insurance for the first time to interbank lending in an attempt to loosen the credit markets and boost borrowing. Despite these and other steps, however, most economists predicted that the U.S. economy was sure to enter a recession, and some said that benchmark had already been reached. See also United States (Economy).

H.3.

The Presidential Election

The financial crisis came right in the midst of the presidential election campaign between the Democratic candidate, Barack Obama, and the Republican candidate, John McCain. Although Obama was leading in the polls and was widely regarded as the frontrunner, McCain made missteps in the midst of the crisis that probably cost him the election. First, he tried to reassure voters by calling the economy “fundamentally sound,” although the depths of the economic crisis soon became apparent. Then, he attempted to cancel the second of three presidential debates, saying he was suspending his campaign so that he could return to Washington, D.C., to help fashion a rescue plan. However, McCain played a relatively insignificant role in the negotiations between the Bush administration and Congress over the rescue plan, and his attempt to cancel the debate struck many observers as somewhat erratic and without justification.

Obama blamed Bush’s economic policies of deregulation for the crisis and linked those policies to McCain, who had also been an advocate of deregulation. Having already made the case that McCain supported Bush in backing the U.S.-Iraq War, Obama’s strategy of linking McCain with the unpopular Bush appeared to prove successful. Obama began to surge in most of the polls, especially in the states of Ohio and Pennsylvania, where economic issues were primary for most voters. In the end Obama was swept into office as a result of widespread dissatisfaction with eight years of the Republican-led Bush administration and growing fears over the economy. He won 53 percent of the popular vote, the most for a Democrat since Lyndon Johnson, and his tally of 365 electoral college votes was impressive.

In becoming the first African American president, Obama put together an impressive coalition that included blacks, Hispanics, and other minority groups and a significant share of the white vote. He won three Southern states—Florida, North Carolina, and Virginia—and made inroads in the West by winning Colorado, Nevada, and New Mexico, states that were formerly reliable as Republican strongholds in presidential elections. With solid support in the Northeast and on the West Coast, the Democrats threatened to make the Republicans a regional, minority party based in the Deep South and the Plains states. Perhaps more threatening to the Republicans, Obama won among all age groups except for those 65 and older. He won overwhelmingly among those aged 29 and younger and among first-time voters, mostly those who had just turned 18. There were no clear class differences in the 2008 election. Although Obama won easily among those earning less than $15,000 a year and although he won a majority of union households, he also won or held even among all other income groups, including those making more than $100,000 annually.

For many observers of American history, Obama’s election was a transformative event, signaling a new era in race relations in the United States and establishing an important milestone in African American history and achievements. Some even called it the final chapter of the American Civil War, or at the very least the fulfillment of the Reconstruction era and the civil rights movement of the 1960s.

I.

The Obama Administration

President Obama wasted no time differentiating his administration from his predecessor’s. His inaugural address on January 20, 2009, contained a number of references to the break from Bush’s policies, and if there was any doubt, his first executive orders dispelled them. In his first few days in office, Obama ordered the closing of the Guantánamo Bay detention facility and an end to interrogation practices by the Central Intelligence Agency (CIA) that many deemed a form of torture or at the very least a violation of U.S. and international law. He took a number of other measures that rescinded Bush policies on the environment, reproductive rights, and scientific research. The first piece of legislation Obama signed expanded the rights of women to sue for wage discrimination. See Employment of Women; Guantánamo Scandal.

Obama’s overriding concern, however, was passage of a bill to stimulate the economy and end a recession that began in December 2007. The economic downturn loomed as the worst since the 1980s as unemployment rose above 7 percent. Obama worked closely with Congress to pass a stimulus bill that promised to create jobs and cut taxes with massive government spending estimated at more than $800 billion.

The first part of this article was contributed by Paul E. Johnson. The second part, from Reconstruction to the Early 21st Century, was contributed by Nancy Woloch.