A decade ago, the financial crisis hit like a tornado, ripping through the nation’s housing sector, slamming into the banking system, toppling landmark institutions, and threatening to wreak even more havoc on the US economy.
George W. Bush and Barack Obama and their teams, along with the Federal Reserve Bank, met that challenge with a pragmatism that set ideology aside in the name of necessity. A concerted effort across two administrations staved off a wider economic disaster.
Yet the financial crisis and Great Recession that followed, which cost more than 8 million people their jobs and some 4 million their homes, hit lower-income citizens harder. So, too, the steady, long-running recovery has stopped short of lifting all boats equally. That’s why engineering better economic opportunities for modest and middle-class earners should be a primary goal for both parties in the years ahead.
When the financial crisis struck head on, in September 2008, policy-makers didn’t have the luxury of thinking that far into the future. The needs were immediate.
“Avoiding another Great Depression was the number one priority,” notes Nobel Prize-winning economist Peter Diamond. “They only way to do that was to rescue the banks, and they did that.”
The much-derided bank bailout — known as the Troubled Asset Relief Program, or TARP — saw the Fed buying preferred bank stock or lending money as a way to recapitalize those institutions to keep them afloat and lending. The federal government also lent to AIG, the massive insurance company, as well as to the Big Three automakers. The Congressional Budget Office has since estimated that some $444 billion was spent. Unpopular though it was, the federal government actually realized a profit on the program. The Fed began stress-testings banks to ensure their future stability.
But all that only addressed part of the problem. The economy was in free fall, with hundreds of thousands of jobs shearing off each month. That made an economic stimulus program one of Obama’s top priorities upon taking office.
Derided by critics, that $787 billion program is credited with mitigating job losses, supporting incomes, and helping jump-start a stalled economy. Some $425 billion came as tax cuts for families and businesses. Tens of billions more went for important infrastructure upgrades. More than 2,600 bridges were fixed. Thousands of miles of roads were repaved. Water service for almost 50 million people was brought up to federal standards.
With its quantitative easing, meanwhile, the Fed kept interest rates at rock bottom. The wide-ranging Dodd-Frank law, passed in 2010, updated and strengthened the financial regulatory system, requiring more transparency and accountability and oversight, and reducing the possibilities for risky behavior by banks.
“The banking system is much safer,” says former congressman Barney Frank, coauthor of Dodd-Frank. “They can’t make the kind of crappy loans they once did.”
So could another crisis recur in the near future?
Not one of the same severity, says Mark Zandi, chief economist of Moody’s Analytics. “The banking system is now much more highly capitalized, the liquidity requirements are stricter, and risk management is much better,” he said. “It is much less likely that we will have a financial event that turns into a crisis that undermines our financial system and requires a bailout.”
Still, a cautionary note: Rather than breaking up too-big-to-fail institutions, the government decided instead to subject them to more oversight and regulation. That being the case, further efforts to roll those regulations back should be strongly resisted.
“Undoing Dodd-Frank would be a disaster,” declares Diamond.
And there is one area where we are not well prepared. With annual deficits soon to crest $1 trillion a year, there’s less room for an Obama-like stimulus if the economy were to take a severe lurch into recession.
Aside from the question of the economy’s overall health, there remain underlying concerns about equity and opportunity. The disparities between the rich and poor mirror those of the 1920s. With productivity growth slow, wages have been languid for broad swaths of the country, leaving many workers feeling as though they are just treading water.
The uneven results frame the economic challenge ahead: finding ways to make today’s strong economy work for everyone.