Revisiting the 2008 Financial Meltdown

This month marks 14 years since the 2008 global financial crisis. The demise of the investment bank Lehman Brothers on September 15th sparked an economic downturn that was felt throughout the world.

The crash led to the worst recession since the Great Depression. It illuminated the dangerous corporate culture that had existed in banking for many years, explaining something as tangled and multi-dimensional as the 2008 financial crisis is fraught with difficulty.

The meltdown was one of the most critical events in American history, and its aftermath saw plenty of hardship. It wiped out some $11 trillion of the nation’s wealth and destroyed more than eight million American jobs by September 2009. It froze up the nation’s vast financial credit system, leaving thousands of firms too short of cash to operate.

It also forced the federal government to spend $2.8 trillion and commit another $8.2 trillion in taxpayer funds to bailing out crippled corporations such as General Motors, Chrysler, Citigroup, Bank of America, AIG, and a host of other “too-big-to-fail” companies run by corporate panjandrums.

It cost millions of Americans their jobs, homes, life savings, and hopes for decent retirements. This was a cataclysm far worse than any natural disaster in the nation’s experience.

The lack of accountability for the banks and other bad actors helped spur social movements from the left (Occupy Wall Street) and the right (the Tea Party), the heirs of which have made themselves heard during elections dating back to 2016. It appeared to many that there were two sets of rules: one for ordinary Americans and another for the rich and well connected.

After the financial crisis, there was no shortage of wannabe Cassandras who supposedly had been warning about this for years. They wrote about “casino capitalism” and “corporate greed” without saying a word about the quite specific causes of this very specific crisis. They have been vindicated only in the way a horoscope might occasionally come true.

In November 2008, just two months after the Lehman Brothers bankruptcy and the Western economy’s descent into the abyss, the Queen of England asked a roomful of academics at the London School of Economics a disarming question: Why had they not seen it coming? They were all caught off guard.

In the years following, many economists and academics have attempted to answer her question, but few have come up with more than citing immediate causes, such as high leverage and a strong appetite for risk and failed to identify the deeper causes.

The Queen’s question resonated with ordinary people, who were baffled at why politicians, bankers, and academics all failed to spot the financial storm on the horizon.

The Financial Crisis Inquiry Commission created by Congress in May 2009 is often cited as the definitive source for information about the causes of the 2008 crisis. The commission was tasked with restoring trust in the banking sector by bringing to light the misdeeds and malfeasance that caused the Great Recession.

But the bipartisan 10-member commission could not agree on the underlying causes of the financial crisis. Instead, it completed its forensic work and produced three conflicting reports in January 2011.

All the members basically agreed on the facts, but disagreements arose over interpretation. For sure, no single narrative or satisfying theory to explain the cause of the financial meltdown emerges from the mother lode of factual information surrounding the crisis, but the variety of conclusions is informative.

It may be decades before anything approaching real perspective about the crisis can be achieved. The situation is similar to the story in the Japanese film “Rashomon,” where different witnesses give conflicting accounts of a crime.

One lesson to be learned is that what can’t be easily understood can’t be easily controlled. So, the question may be when, not whether it will occur again.