With much of the damage from the Great Recession finally healing, it's important to remember what happened and why.
On Wednesday, the Federal Reserve raised interest rates for the second time in three months and signaled that we should expect two more increases this year and three in 2o18. It seems as if the Great Recession and its years-long overhang are finally over.
Before the event fades into history, legend and myth, let’s take stock. The worst economic crisis since the Great Depression — and one that could have become another Great Depression — was caused by a specific series of policies. It was no black swan. Anyone paying attention, without the blinders of greed or brightsiding, could have seen it coming.
The Fed itself shoulders some blame, with the asset bubbles it allowed to grow under the leadership of Alan Greenspan. Worse was the laissez-faire “the market will regulate itself” attitude of Greenspan and Presidents George W. Bush and Bill Clinton.
“Deregulation” was a chief cause, including the repeal of the Depression-era safeguard Glass-Steagall Act, which separated commercial banking backed by taxpayers from risky investment banking. It was really a shifting of regulatory power from the public good to the unhindered benefit of the big banks, shadow banking sector and Wall Street. The “financial services sector” became enormous, highly concentrated and in control of regulators. The institutions were dangerously interconnected worldwide.
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This led to the big gaudy spree of the housing bubble fueled by subprime loans, which were bundled into securities and sold to Wall Street’s clients. Derivatives proved highly profitable, even though the likes of former Clinton Treasury Secretary Robert Rubin later admitted even he didn’t understand many of them. The riskier the better, the more leverage and more opaque the better, these hustles enriched bank and Wall Street executives. But many were dangerous — or had a value that was “derived” from nothing.
What happened next was exactly what Sen. Carter Glass and Rep. Henry Steagall could have predicted, had they still been alive.
The crash led to the Panic of 2008, when banks stopped lending to each other and a multibillion-dollar money market mutual fund “broke the buck” — this supposedly safest investment’s share became worth less than a dollar. The government’s gambit in “punishing” the Street by letting Lehman Brothers fail backfired badly. Washington Mutual, Seattle’s last large financial institution, was allowed to fail and be sold to JPMorgan Chase — even though there was a sound thrift there aside from Kerry Killinger’s subprime house of rackets.
Unlike the 1930s, the Fed embraced its role as lender of last resort, then went on to carry out extraordinary monetary policy measures, including buying up bad mortgages. Cool handling of the crisis by Bush Treasury Secretary Hank Paulson and then the Obama administration put out the fire and prevented a worldwide financial meltdown. A large stimulus package made a beginning to repair the demand hole caused by the collapse, but it wasn’t sustained and a deep recession was inevitable. We also benefited from the remnants of protections put in place by the New Deal, such as bank deposit insurance.
Nobody went to jail. Nobody’s exorbitant compensation made by the risky business was clawed back. Taxpayers footed the bill. Not bringing the rule of law to Wall Street is a great failure of the Obama administration. The failure to make big, sustained public investments in infrastructure and research at historic low interest rates? That’s the fault of Republicans in Congress and their ruinous “austerity” and budget hostage-taking. Both should have done more to help average Americans — widespread debt forgiveness would have been a start.
The right immediately began a propaganda campaign, denying that the New Deal had done anything to ease the pain of the Depression and blaming the recent meltdown on home loans given to minorities by the quasi-government institutions Fannie Mae and Freddie Mac. Remember, gub’ment is always the problem. None of this was true as the root cause of the bubble, panic and recession.
The Dodd-Frank legislation, passed during the two years when Democrats held both houses of Congress, was a start to reforming the worst Wall Street excesses. But the big banks got bigger and retained their political power. They were able to weaken much of the new law and slow-walk making its provisions into rules, especially for derivatives and compensation. Dodd-Frank was no Glass-Steagall. But now it’s due to be dismantled by the Republican regime. Also likely to fall is one of the best reforms to come out of the crisis, the federal Consumer Financial Protection Bureau.
Now we’re back to the religion of laissez-faire. What could possibly go wrong?
Today’s Econ Haiku:
Up, up and away
With privatized air control
Souls must pencil out