By Karl Reiner
The Great Recession that grew worse in the wake of the financial collapse of 2008 blew a large hole in the current theories of finance. Wall Street was supposed to be capable of calibrating its risks and markets were supposedly able to self-regulate. Unfortunately for the U.S. population, events proved they could not.
Many sectors of American society had accepted the seductive idea that easy debt and speculative mortgages were good policies. The giddy mix was a product of shifting political philosophy, deregulation and a lack of oversight, dicey mortgages and the unusual belief that housing prices would only continue to go up.
The ridiculously rapid climb in housing prices, which doubled in a decade, should have been a warning to regulators. The amount of American mortgage debt doubled between 2000 and 2007, increasing to $10.5 trillion. It was the biggest housing debt load in the nation’s history.
History does repeat itself. The steadily rising income inequality index was an indicator that things were getting out of hand in the economy. The richest 1% of the population took home about 10% of the national income each year in the 1952- 1980 period. Starting in the mid-1980s their share began to rise. It reached 18.3% in 2007. The last time it was that high was in 1929 when it reached 18.4% just before the onset of the Great Depression.
As the financial sector unraveled, desperate and massive government intervention managed to keep the recession from turning into a depression. During the last months of the Bush administration, a beleaguered Treasury Secretary Paulson moved across the ideological spectrum, from free-market supporter to massive interventionist. According to his critics, he metamorphosed from being a “dupe for Wall Street” into a “socialist intent on nationalizing big parts of the economy.”
In January 2009, when President Obama took over, the situation remained dire. Two car manufacturers were heading for bankruptcy; the banking system was almost completely dysfunctional. National output, employment and housing prices and were continuing to slide downward at a rapid pace.
The consequences of the recession have been horrific. Banks have written off over $600 billion in loans. Over 100 depository intuitions had to be taken over by the government.
About a quarter of the nation’s homeowners (approximately 10 million) owe more on their homes than they are worth. At its high point, the unemployment rate reached 10.2% as over 8 million jobs evaporated.
Participation in the food stamp program has soared. It now serves approximately 45 million people, nearly one in seven Americans. The wealth of Americans dropped from $64 trillion to $51 trillion. Everyone got poorer due to job loss, falling home values and the drop in the value of retirement accounts. The federal deficit has jumped dramatically due to the rescue costs. It now stands at over $16 trillion.
With the help of the Federal Reserve, the situation has been stabilized and a recovery has gotten underway. Thus far in the slog out of the deep ditch of recession, economists give President Obama’s team grades ranging from A- to Incomplete for their handling of the economic calamity and federal debt policy
Economists acknowledge that a recession caused by a financial crisis has a much longer recovery time. This one has also has complicating factor. The Tea Party inspired gridlock in Congress has created massive uncertainty in federal deficit reduction and budget policies. That discourages consumers from spending and businesses to invest.
As voters mull their ballot choices, they need to remember that repairing the extensive damage caused by the financial crisis will take time. They also ought to take into consideration all the factors behind the conversion of Secretary Paulson.