5 Lessons of the Great Recession

By Trumbull, Mark | The Christian Science Monitor, September 8, 2013 | Go to article overview

5 Lessons of the Great Recession


Trumbull, Mark, The Christian Science Monitor


Christopher Dodd remembers the moment - vividly. Even though he had witnessed a lot of history during his 30 years in the US Senate - wars, impeachment proceedings, terrorist attacks - Mr. Dodd recalls this encounter as one "seared in my memory."

It was Sept. 18, 2008. Lehman Brothers, the New York financial firm, had collapsed three days earlier because of its risky investments and the fall of the housing market. The Federal Reserve had already bailed out Bear Stearns, another investment-banking firm, and AIG, the big insurance company. Other Wall Street firms were tremulous. The stock market was plunging. Credit markets were seizing up nationwide.

Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr. called a meeting with top lawmakers. They met early that evening in House Speaker Nancy Pelosi's Capitol Hill office, where a mural on one hallway wall depicts - perhaps prophetically - a maiden floating in the air with no visible means of support.

It was at this meeting that Dodd, who was in the room as the chair of the Senate Banking Committee, remembers Mr. Bernanke, a man usually as placid as the Federal Reserve's marble exterior, saying flatly: "Unless you act in a matter of days, the entire financial system of this country and a good part of the world will melt down."

A student of the Great Depression, Bernanke explained how such a collapse would affect the economy, from bankruptcy at firms like General Motors to soaring unemployment. The message for Congress was blunt: The Fed and Treasury could no longer prop up companies one by one. A more coordinated - and drastic - approach was needed. They needed a Congress-authorized rescue plan.

Eventually Congress did act, after an acrimonious debate, passing a rescue package that would allow the Treasury to inject billions into troubled firms. During these chaotic days, the full depth of the financial crisis began seeping out of the corridors of power in Washington and into the living rooms and corporate cubicles of America.

Today, five years later, the United States and other nations are still struggling with the task of recovering from the worst financial crisis since the 1930s - and formulating how to prevent a similar disaster from happening in the future.

The economy, despite massive revival efforts, is growing only tepidly - a problem due in part to lingering effects of the crisis. For example:

- One out of 5 mortgage borrowers today remains "under water," with loan balances larger than the home's market value.

- Unemployment in the US still hovers at a stubbornly high 7.4 percent - significantly higher at this stage than in any other economic recovery since World War II.

- - Four years after the recession's official end, the Fed continues to hold short-term interest rates near zero percent in a bid to revive the economy - a remedy unprecedented in length and magnitude in Fed history.

Such circumstances help explain why, in a new Christian Science Monitor/TIPP poll, 36 percent of Americans say the financial crisis has made the economy permanently weaker. Some 49 percent say the crisis weakened the economy, but that the problems will ultimately fade. Only 11 percent say the economy has already regained the ground lost during the crisis.

The past five years have hardly been all gloomy. The economy has improved, many debt-laden families and firms have cleaned up their books, and both corporations and regulators alike have taken major steps to make the financial system safer for the future.

Yet the task is far from finished. The Dodd-Frank Wall Street Reform and Consumer Protection Act - Congress's major response to the crisis, passed in 2010 - is only starting to be implemented. By one tally, federal agencies have completed less than half of some 398 required rulemakings under that law.

What did the country learn from the crisis? Could a similar collapse happen again? Here are five take-aways from a Great Recession that has indelibly affected a generation, in America and around the world.

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