The balance sheet of the global financial crisis

An excellent summary of the balance sheet of the global financial crisis from Nelson Schwartz in the Times,

The financial crisis didn’t just kill the dream of getting rich from your day job. It also put an end to a fundamental belief of the middle class: that owning a home was always a good idea because prices moved in only one direction — up... When the bubble burst, the bedrock investment for many families was wiped out by a combination of falling home values and too much debt. A decade after this debacle, the typical middle-class family’s net worth is still more than $40,000 below where it was in 2007, according to the Federal Reserve. The damage done to the middle-class psyche is impossible to price, of course, but no one doubts that it was vast.

Banks were hurt, too, but aside from the collapse of Lehman Brothers, the pain proved transitory. Bankers themselves were never punished for their sins. In one form or another — the Troubled Asset Relief Program, quantitative easing, the Fed’s discount window — the financial sector was supported in spectacular fashion.

Like the bankers, shareholders and investors were also bailed out. By cutting interest rates to near zero and pumping trillions — yes, you read that right — into the economy, the Federal Reserve essentially put a trampoline under the stock market. The subsequent bounce produced a windfall, but only for a limited group of beneficiaries. Only about half of American households have any exposure to the stock market, including 401(k)’s and retirement plans, and ownership of the shares of individual companies is clustered among upper-income families.

For homeowners, there wasn’t much of a rescue package from Washington, and eight million succumbed to foreclosure. Sometimes, eviction came in the form of marshals with court orders; in other cases, families quietly handed over the keys to the bank and just walked away. Although home prices in hot markets have fully recovered, many homeowners are still underwater in the worst-hit states like Florida, Arizona and Nevada. Meanwhile, more Americans are renting and have little prospect of ever owning a home.

Worsening the picture, the post-crisis era has been marked by an increased disparity in wealth between white, Hispanic and African-American members of the middle class. That’s according to an analysis of Fed data by the Pew Research Center, which found that families in the latter two groups were more dependent on housing as their principal form of investment. Not only were both minority groups harder hit by foreclosures, but Hispanics were also twice as likely as other Americans to be living in Sun Belt states where the housing crash was most severe.

In 2016, net worth among white middle-income families was 19 percent below 2007 levels, adjusted for inflation. But among blacks, it was down 40 percent, and Hispanics saw a drop of 46 percent. For many, old-fashioned hard work has simply not been a viable path out of this hole. After unemployment peaked in the fall of 2009, it took years for joblessness to return to pre-recession levels. Slack in the labor market left the employed and unemployed alike with little leverage to demand raises, even as corporate profits surged... A recent study by the Federal Reserve Bank of St. Louis found that while all birth cohorts lost wealth during the Great Recession, Americans born in the 1980s were at the “greatest risk for becoming a lost generation for wealth accumulation.”...

Maybe it was inevitable that when half the population watches its wages stagnate while the other half gets rich in the market, the result is President Donald Trump and Brexit.

By the way, as an assessment of the post-crisis response, there could not have been anything more stark than this by Neil Irwin, and this by Peter Doyle. The former was a close observer of the response whereas the latter was a participant in the response. In particular, their respective assessments of the recent Brookings conference that brought together the leading crisis policy makers. 

Neil Irwin describes the post-crisis response as "the high-water mark for a mold of centrist, technocratic policymaking that seeks to tweak and nudge existing institutions toward better outcomes". His enthusiastic paean to the "technocrats" like Tim Geithner, Hank Paulson, and Ben Bernanke, without any reference to counterfactual situations nor the issues raised by his own colleague, Nelson Schwartz in the above-referenced article, is representative of the hegemony and rot among opinion makers on the liberal side. Doyle raises several concerns, none of which merit even a cursory mention for Irwin. Nor any mention of the consequences of the post-crisis response, nor the fact that the so-called recovery is confined only to the top 10% and has barely touched the rest, nor even the toxic debt legacy fuelled by the extraordinarily long period of low interest rates. 

This and this present alternative perspectives just on the Lehman decision. 

It is not so much the specifics of the policies initiated in the immediate aftermath of the crisis that should be the matter for debate. It is about the manner in which those policies were formulated and the stakeholder consultations that went into it. It is about those who were heard and who were not, those whose interests were prioritised and those whose interests were marginalised. It is about those policies which were not pursued with same fervour or not initiated at all. It is about the continuation of those policies well beyond reasonable limits, both in scale and in time duration. It is about the consequences of those actions that has left the financial markets more concentrated and arguably at least as unstable as before the crisis. It is about the failure to entrench the learnings from the crisis and prevent a slip-back to the same ideologies and policies that led to the crisis. It is about how the post-crisis response policies have set the stage for the next financial crisis. It is about how the same "technocrats" contributed to each of the aforementioned failings. In the absence of a reference to any of these, Irwin's qualification of the post-crisis policy responses as a "success" is stunning!