Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

By Thomas H. Stanton | Go to book overview
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Repairing Our Public and Private Institutions:
A NATIONAL IMPERATIVE

I made a mistake in presuming that the self-interest of organizations,
specifically banks and others, was such that they were best capable of
protecting their own shareholders and the equity in the firms.

—ALAN GREENSPAN, 2008

The United States has experienced the most significant failure of its financial system since the Great Depression. The federal government committed over $3 trillion in spending, loan purchases, loans, and loan guarantees through the Treasury, Federal Reserve System, and Federal Deposit Insurance Corporation (FDIC) to support financial institutions and auto companies among other purposes, and enacted a $787 billion economic stimulus package. The world came close, as Federal Reserve Chairman Ben Bernanke said, to “Depression 2.0.” 1

Princeton professor Alan Blinder and economist Mark Zandi estimated in 2009 that the projected total costs of the financial crisis would exceed $2.35 trillion, or about 16 percent of GDP.2 These costs included the stimulus package, government support for Fannie Mae and Freddie Mac, the Economic Stimulus Act of 2008, and emergency unemployment benefits, to name the larger items. The economy struggles and the recession catches government in a bind: demand for services such as unemployment and healthcare rises just as tax revenues drop.

Personal costs of the crisis were immense. Perhaps 10 million households may lose their homes to foreclosure.3 House prices declined to the point where by 2010, almost one-quarter of homes were worth less than the mortgages on the property. Stock prices as measured by the Wilshire 5000 index fell 57 percent from the peak in October 2007 to the deepest point in March 2009, before rising again. Median household wealth fell by 25 percent from 2007 to 2009, for a loss of about $ 17 trillion.4 The unemployment rate doubled, and millions of people lost their jobs.5 Real median income fell to $49,445 in 2010, the

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