September 15th marks the tenth anniversary of the demise of the investment bank Lehman Brothers, which presaged the biggest financial crisis and deepest economic recession since the nineteen-thirties. After Lehman filed for bankruptcy, and great swaths of the markets froze, it looked as if many other major financial institutions would also collapse. On September 18, 2008, Hank Paulson, the Secretary of the Treasury, and Ben Bernanke, the chairman of the Federal Reserve, went to Capitol Hill and told congressional leaders that if they didn’t authorize a seven-hundred-billion-dollar bank bailout the financial system would implode. Some Republicans reluctantly set aside their reservations. The bailout bill passed. The panic on Wall Street abated. And then what?
The standard narrative is that the rescue operation succeeded in stabilizing the financial system. The U.S. economy rebounded, spurred by a fiscal stimulus that the Obama Administration pushed through Congress in February, 2009. When the stimulus started to run down, the Fed gave the economy another boost by buying vast quantities of bonds, a policy known as quantitative easing. Eventually, the big banks, prodded by the regulators and by Congress, reformed themselves to prevent a recurrence of what happened in 2008, notably by increasing the amount of capital they hold in reserve to deal with unexpected contingencies. This is the basic story that Paulson, Bernanke, and Tim Geithner, who was the Treasury Secretary during the Obama Administration, told in their respective memoirs. It was given an academic imprimatur by books like Daniel Drezner’s “The System Worked: How the World Stopped Another Great Depression,” which came out in 2014.
This history is, on its own terms, perfectly accurate. In the early nineteen-thirties, when the authorities allowed thousands of banks to collapse, the unemployment rate soared to almost twenty-five per cent, and soup kitchens and shantytowns sprang up across the country. The aftermath of the 2008 crisis saw plenty of hardship—millions of Americans lost their homes to mortgage foreclosures, and by the summer of 2010 the jobless rate had risen to almost ten per cent—but nothing of comparable scale. Today, the unemployment rate has fallen all the way to 3.9 per cent.
There is much more to the story, though, than this uplifting Washington-based narrative. In “Crashed: How a Decade of Financial Crises Changed the World,” the Columbia economic historian Adam Tooze points out that we are still living with the consequences of 2008, including the political ones. Using taxpayers’ money to bail out greedy and incompetent bankers was intrinsically political. So was quantitative easing, a tactic that other central banks also adopted, following the Fed’s lead. It worked primarily by boosting the price of financial assets that were mostly owned by rich people.
As wages and incomes continued to languish, the rescue effort generated a populist backlash on both sides of the Atlantic. Austerity policies, especially in Europe, added another dark twist to the process of political polarization. As a result, Tooze writes, the “financial and economic crisis of 2007-2012 morphed between 2013 and 2017 into a comprehensive political and geopolitical crisis of the post–cold war order”—one that helped put Donald Trump in the White House and brought right-wing nationalist parties to positions of power in many parts of Europe. “Things could be worse, of course,” Tooze notes. “A ten-year anniversary of 1929 would have been published in 1939. We are not there, at least not yet. But this is undoubtedly a moment more uncomfortable and disconcerting than could have been imagined before the crisis began.” [Continue reading…]