Five years later: How the Great Recession changed America

Five years after the U.S. economy imploded, said Robert Reich in HuffingtonPost.com, “the gambling addiction of Wall Street’s biggest banks is more dangerous than ever.” It was five years ago this week that Lehman Brothers went bankrupt after losing several billion-dollar bets on derivatives tied to home mortgages, sending the economy into a tailspin and ushering in the worst financial crisis since the Great Depression. The government bailout of Wall Street’s too-big-to-fail giants prevented the recession from turning into a depression—but five years on, “they’re back to too many of their old habits.” JPMorgan Chase, for example, last year blew $6.2 billion by betting on the credit default swaps that got the banking sector into trouble in the 2000s, and has been accused of fraud in collecting credit card debt and foreclosing on mortgages. The Dodd-Frank legislation passed by Congress in 2010 was supposed to prevent these kinds of abuses, said Michael Hiltzik in the Los Angeles Times. But Wall Street’s army of lobbyists has ensured that the law’s new regulations to promote transparency and limit high-risk trades are “shot through with loopholes.” Far from getting smaller, America’s six largest banks now have 28 percent more assets than in 2007. The banks are bigger and still dangerously under-regulated—and if they failed, would require another massive government bailout. Have we learned nothing at all?

Actually, “Wall Street has improved enormously” since 2008, said Kevin Roose in NYMag.com. The big banks are much better capitalized than they were before the crash, meaning they have more assets to cushion them from unexpected losses. Most financial institutions took a beating during the crash, and the “devil-may-care attitude” that once ruled Wall Street has largely disappeared, with banks holding smaller portfolios and avoiding the massive risks that sank them in 2008. When two banks tried to package and sell a “synthetic CDO” this year—the type of derivative that caused AIG’s collapse—“nobody wanted to buy.” And while it’s true the Dodd-Frank legislation is being watered down by lobbying, regulators have “stiffer backbones,” and are winning at least some of the battles. Wall Street is far from perfect—but it’s a “lot less of a threat to American prosperity than it was five years ago.”

What prosperity? said Paul Krugman in The New York Times. The financial industry may have come roaring back in recent years, but middle-class Americans have not recovered from the staggering blows of the Great Recession, which economists estimate cost the country $14 trillion in lost economic output. Most Americans are still living in a diminished economy, with high unemployment and flat wages, and the trend of income inequality that began in the 2000s has only accelerated. A new study by Berkeley economist Emmanuel Saez found that the richest 1 percent of the country reaped 95 percent of the recovery’s gains since 2009, with their incomes growing by 31 percent. Inequality of such magnitude “is poisoning our society,” making a mockery of the American dream of equal opportunity.

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“This cannot long stand,” said Charles M. Blow, also in the Times. The Occupy Wall Street movement, which began two years ago this week, introduced the idea of the 99 percent—a struggling underclass dominated by a 1 percent of wealthyplutocrats. It’s a narrative that has outlived the protests, and embedded itself in the “national conscience.” Anger is growing. If the country’s leaders don’t start coming up with some solutions, “eventually, the 99 percent will demand better.”

But blaming the 1 percent is too easy, said Robert Samuelson in The Washington Post. Five years ago, we all became “victims of success.” Decades of “near-perpetual prosperity” fooled -everyone—on Wall Street and Main Street alike—into thinking that America had found the secret to endless economic growth. Bankers made increasingly risky bets on the market, while consumers made equally risky investments in real estate and took on way too much debt. We believed that home prices and markets would keep rising forever—and were shocked when they collapsed. Today, the “foolish optimism” of 2008 has become the “protective pessimism” of 2013. Companies and consumers are now reluctant to borrow, spend, lend, hire, or take “economic risks of any kind.” As a result, our once-dynamic economy has stagnated. Five years later, the real problem is not that Wall Street hasn’t changed enough. It’s that the rest of us have changed too much.