The financial crisis that broke out a decade ago was a long time in the making, and a long time in the playing out. Over just a few days in September, 2008, Lehman Brothers essentially ceased to exist, the Federal Reserve took over American International Group to prevent a wider collapse, and commercial banks and mortgage lenders around the country failed. The speed and the scale of destruction were so breathtaking that only the direst analogies seemed adequate—the stock market crash of 1929, or an economic 9/11. Citigroup appeared poised to go down next, with General Motors and Chrysler to follow. Everything solid in the American economy turned out to be built on sand. But the crisis took years to emerge. It was caused by reckless lending practices, Wall Street greed, outright fraud, lax government oversight in the George W. Bush years, and deregulation of the financial sector in the Bill Clinton years. The deepest source, going back decades, was rising inequality. In good times and bad, no matter which party held power, the squeezed middle class sank ever further into debt.
You could pick up early warning signs in 2006, in states such as Florida, where the high-flying housing market, suspended in midair by irrational faith, suddenly looked down and fell to earth. Then American homeowners learned that their most valuable and tangible asset had become tangled up in obscure entities called derivatives, mortgage-backed securities, and collateralized debt obligations—financial instruments that spread around the world and, once gone bad, threatened to kill off whole banks, and to cripple countries. If a defaulted loan on a house in Tampa was used to make bonds owned by investors in Japan, the house infected the global economy.
When the crash came here, it wiped out nine million jobs, took away nine million homes, erased retirement accounts, and pushed large numbers of Americans out of the middle class. Every economic calamity creates its own imagery. The Great Recession that accompanied the financial crisis didn’t bring back breadlines or industrial strikes. This time, the desperation was quiet and lonely: a pile of mail at the doorstep of a deserted house in a brand-new subdivision; a foreclosure judge presiding over a stack of files; a middle-aged man playing video games all day with the shades drawn; a retired woman trying to get a human being on the phone at the bank.
At first, American institutions responded with signs of health: the Federal Reserve stopped the free fall of the biggest banks; the press uncovered corruption and fraud; and a bipartisan Congress passed legislation to get credit flowing and rescue the financial sector. Then the electorate turned out the party in power. The financial crisis decided the election of 2008. Americans who might never have imagined themselves choosing a black President voted for Barack Obama because he understood the scope of the disaster and offered hope for a remedy.
But our democracy turned out to be unwell. The first symptom of sickness came within three weeks of Obama’s inauguration. In February, 2009, with the economy losing seven hundred thousand jobs a month, Congress passed a stimulus bill—a nearly trillion-dollar package of tax cuts, aid to states, and infrastructure spending, considered essential by economists of every persuasion—with the support of just three Republican senators and not a single Republican member of the House. Rather than help save the economy that their party had done so much to wreck, Republicans, led by Senator Mitch McConnell, chose to oppose every Democratic measure, including Wall Street reform. In doing so, they would impede the recovery and let the other party take the fall. It was a brilliantly immoral strategy, and it pretty much worked.
The President didn’t always aid his own cause. He had campaigned as a visionary, but he governed as a technocrat. His policies helped to end the recession within months, but the recovery was excruciatingly slow. The stimulus package could have been much larger, with added money for job creation; more indebted homeowners could have been kept in their houses. Perhaps Obama made too many compromises in the hope of appealing to a bipartisanship that was already dead. But his biggest mistake was to save the bankers along with the banks. After a financial crisis caused in part by fraud, not a single top Wall Street executive was brought to trial. The public wanted to punish the malefactors, but justice was never done.
In the years after the crash, you could feel the fabric of the country fraying. The Tea Party and Occupy Wall Street rose up as opposite expressions of antiestablishment rage, nourished by the sense that colluding élites in government and business had got away with a crime. The game was rigged—that became the consensus of the alienated. The left turned its anger on corporations and banks; the right blamed bureaucrats, minority groups, and immigrants. Rising extremism, especially among Republicans, made it impossible for important facts uncovered by the press or asserted by politicians to have an impact. Public trust in just about every American institution declined. Obama’s inspiring Presidency appeared to float high above a landscape where bands of citizens were adrift and quarrelling.
Economically, the country has changed surprisingly little since 2008. The big banks have returned to risky practices, and Republicans are trying to undo the Dodd-Frank reform law, which was enacted to prevent another collapse. The distribution of income and wealth in America is as lopsided as ever. Despite almost ten years of economic growth, real wages are stuck at their pre-crisis level, while corporate profits are soaring and stock prices have reached record highs. All the misshapen economic trends of the previous decade are still with us.
The lasting effect of the crisis is in our politics. The Presidency of Donald Trump is an overdetermined fluke, an accident with a thousand causes. Among them is the catastrophic event that gutted millions of lives and ended in no fair resolution, only cynicism. The economic indicators are strong right now, but before long there will be another financial crisis. They come every seven or ten years, each bearing the features of its time. If the previous one was the result of overconfidence in free markets, the next might be triggered—as in Turkey today—by the behavior of an authoritarian leader. When it comes, we’ll be less prepared to address it than we were in 2008. This President has made an enemy of facts, Congress no longer passes rational laws, and American democracy is ten years unhealthier. ♦
