If you think you have heard it all before about the 2008 financial meltdown, then you need to listen more closely. Enough is never enough when it comes to learning about what caused the crisis and the recession that followed.
This month marks the 10th anniversary of the financial crisis that devastated Wall Street and Main Street. While the autumn leaves were falling in September 2008, months of uncertainty crystallized to spark a financial panic.
The crisis, the worst financial downturn since the Great Depression, was triggered by the bursting of a housing price bubble that had been fueled by increased risk in mortgage lending. As a result, millions of Americans lost their jobs, homes, or both.
The crisis had many causes, including too much irresponsible borrowing, foolish investments, the credit bubble that resulted from loose monetary policy, the housing bubble, national housing policies and non-traditional mortgages, relaxed mortgage lending standards, credit ratings and securitization, financial institutions’ concentrated risk, leverage and liquidity risk, 30 years of deregulation, securities firms converting from partnerships to corporations and perverse compensation incentives.
Scratch the familiar refrain of greed as a cause. Greed has been a constant in human affairs for millennia. It was not a new attribute in the lead up to the crisis.
Today the economy is strong, according to official measures. The United States Bureau of Economic Analysis estimates that GDP growth reached 4.1 percent in the second quarter of 2018. Consumer confidence is high and financial markets are flirting with records. The housing market, the epicenter of the crisis, has recovered in many places. Add low unemployment and things are looking good.
Wall Street has profited every year since the recession ended in 2009. Average Wall Street compensation, consisting of salary and bonus, hit $422,000 in 2017, 13 percent higher than the previous year, according to the New York State Comptroller.
In contrast, the latest Census Bureau data shows that the median income for American employees was $59,039 in 2016. Last month the average hourly wage rose 10 cents, to $27.16, according to the Bureau of Labor Statistics. While that was the largest gain since 2009, the increase was roughly equal to inflation, which eats away at purchasing power.
The crisis strikes some people as ancient history. Others, who saw their net worth wiped out are still trying to recover. They want Old Testament justice for the financial institutions that got bailed out from their reckless behavior while ordinary people suffered and continue to tread water thanks to ongoing wage stagnation. The hope is that as it gets hard to fill jobs with the country approaching full employment, wages will go up and the average American will enjoy the recovery.
While many analysts hesitate to blame American families for contributing to the financial crisis, they did play a role, aided and abetted by bankers and mortgage brokers. To put their role in context, consider that highly risky mortgages were attractive, given that real wages in the United States had been stagnant since the early 1970s.
People came to understand the power of leverage, which had previously been available only to wealthy investors. No-down payment mortgages with adjustable rates reduced their initial costs, providing the opportunity to improve their standard of living and enjoy wealth appreciation.
The assumption was that housing prices always increase. The rising value of the house would allow them to refinance and upgrade to a fixed-rate mortgage. When the housing bubble burst, many families were ravaged.
An economy that is strong for some continues to have harmful effects on the physical and emotional health of ordinary Americans. The results are a permanent state of outraged class warfare, declining social mobility, a shrinking middle class, and widening income inequality.
There is much to be mad about and plenty of blame to go around. Wall Street was the ultimate beneficiary of the Great Recession, not Main Street.
Originally Published: September 23, 2018