The Great Recession 10 Years Later: Lessons We Still Have To Learn

Authored by Robert Bruner, op-ed via TheHill.com,

Ten years ago this month, a recession began in the U.S. that would metastasize into a full-fledged financial crisis. A decade is plenty of time to reflect on what we have learned, what we have fixed, and what remains to be done. High on the agenda should be the utter unpreparedness for what came along.

The memoirs of key decision-makers convey sincere intentions and in some cases, very adroit maneuvering. But common to them all are apologies that today strike one as rather lame.

“I was surprised by the sudden crisis,” wrote George W. Bush, “My focus had been kitchen-table economic issues like jobs and inflation. I assumed any major credit troubles would have been flagged by the regulators or rating agencies. … We were blindsided by a financial crisis that had been more than a decade in the making.”

 

Ben Bernanke, chairman of the Fed wrote, “Clearly, many of us at the Fed, including me, underestimated the extent of the housing bubble and the risks it posed.” He cited psychological factors rather than low interest rates, a “tidal wave of foreign money,” and complacency among decision-makers.

 

Timothy Geithner said that, “failures of foresight were primarily failures of imagination … our visions of darkness still weren’t dark enough.”

 

And Henry Paulson explained that “we believed the problem was largely confined to subprime loans. … (Then) the problems were coming far more quickly.”

Surprise, underestimation, poor imagination, and disbelief in an adverse outcome are hallmarks of the onset of a financial crisis.

My studies of the 17 major financial crises since the founding of the Republic reveal that over-optimism is an important driver of the bubbles that eventually become busts. As the legendary investor, Sir John Templeton, once said, “The four most dangerous words in investing are ‘This time is different.’” Such was the mindset that real estate prices could only rise (2008), dot-com companies would forever grow and be profitable (2001), or that the Russian government would never default (1998).

These days, the blogosphere chatters about a coming crash and financial crisis, for the obvious reason that conditions feel bubble-ish. We are in the late stage of the third longest economic expansion and second-longest bull market in U.S. history. Stock prices are high: The cyclically-adjusted price-earnings ratio is at the third-highest since 1880. Consumer confidence is buoyant. The personal saving rate, 3.1 percent, is near the all-time low. According to the Fed, financial conditions are looser than average. House prices have broken above their peak at the last housing bubble. A Saudi prince paid $450 million for a painting. And nearly every day, Bitcoin sets record prices.

To be sure, regulatory reforms since 2008 have produced more strongly capitalized banks, tests of resilience to shocks, more inter-agency coordination, and some consumer protections. But like the generals who are prepared to fight the last war, these reforms don’t persuade me that we’ll be ready for the next crisis.

History shows that crises arise unexpectedly from corners of the economy that fell beyond the conventional radar screen — in such corners, regulations are light or nonexistent, information is scanty, players are relatively unknown, and flows of capital in and out are particularly hot. Human ingenuity will always create such corners of the economy, either to serve new needs or to arbitrage around regulations. To eliminate every scintilla of systemic risk in the financial sector would be extraordinarily costly and would breed an intolerable regime of surveillance.

Yet I believe that there is one thing that the president and other leaders could do that would help to mitigate the risk of a financial crisis: reinforce a national culture of prudence — this includes the virtues of earning your money before you spend it; saving for a rainy day; investing wisely; honoring your debts; using resources carefully; respecting the property rights of others; and providing for the welfare of family and community. For the president and leaders of Congress to say all of this would evoke gales of laughter in the wake of recent action. Yet the bully pulpit of leadership can set a powerful tone.

At the outset of this tenth anniversary of the Global Financial Crisis, it is well worth remembering that we require not only vigilance from our leaders, but also the ability to articulate enduring values that will assure the sustainability of our society. We have had a culture of prudence in America before: “Use it up, wear it out, make it do, or do without” was the simple rhyme of the 1930s upon which America built an episode of extraordinary growth to the 1970s.

A culture of prudence is a culture of resilience. Prudence and resilience can trump surprise. Would that the president set this tone.

Comments

Endgame Napoleon Cognitive Dissonance Wed, 12/27/2017 - 18:00 Permalink

The reason that Bush, Geithner, Bernanke etc. did not see it coming was simple: they have not been in the churn-mobile job market, which is full of $10 to $12-per-hour jobs that are not even substantial enough to call jobs and certainly not substantive enough to sustain a mortgage over time. Why? Because, other than a handful of managers, these jobs fall into the following categories for the vast majority of employees:

1) temporary

2) part-time

3) high-turnover

4) 1099 gig, meaning you pay twice-as-high SS tax — 15.3%, not 7.65% — for a low-wage contract job that just provides a little income while also providing your own expensive licenses, tools, etc., often incurring biannual, state-required expenses and working in a pyramid-style arrangement on straight commission with zero benefits.

Yes, there are few who have greater longevity in low-wage, hourly jobs despite enormous amounts of excused absenteeism, usually moms with the following sources of unearned income that have nothing to do with the job, making it easy for them to accept rock-bottom pay:

1) spousal income that covers housing,

2) child support that covers rent,

3) free or nearly free rent in section 8 or subsidized rent in mixed-income apartments in safer areas than most college grads can afford,

4) free EBT food,

5) monthly cash assistance,

6) free electricity,

7) nearly free Headstart,

8) refundable child tax credits that, for now, top out at $6,444 (4 months of full-time wages in a $9-per-hour job), but will apparently double to $12,888 (which will be over half a year’s wages in many jobs, making work for NON-parents with earned-only income even less worth it).

Employers like workers who do not need to cover rent and other major household bills with earned-only income. Employers like a welfare-buttressed workforce of citizens and noncitizens, with “somethin’ comin’ in” from 1) government, 2) a spouse or 3) an ex spouse, as one employer explained it to me, a childless, single applicant with zero unearned income for womb productivity.

That is why crony moms in back-watching gangs dominate many [office] jobs and are either taking tons of unofficial, excused time off in groups of often 98% childbearing-age mom employees, or they are working part time to stay below the earned-income limit for welfare and refundable (EITC) child tax credits up to $6,444.

Immigrants, sporting the SS cards of US-born kids, get this unearned income from government, too, when the [traceable] wages from a sole, male breadwinner fall below the earned-income limit for welfare. This has caused wage depression for American males for 40 years.

Wages have been inadequate to cover rent and a full range of basic bills for [individual] citizens who lack a spousal income, or who are not being paid by welfare programs and the US Treasury Department to have sex and reproduce, for DECADES.

Rent takes more than half of monthly, earned-only income for individual citizens in low-per-capita-income states, like the ones below and [many] more.

It is not like you can count on a low-wage job long enough to cut your food intake to below 1,000 calories per day to afford rent that consumes more than half of your monthly pay.

BECAUSE.....

The jobs are often fly-by-night, churn and [scam] jobs, making the virtue-building argument less feasible in reality, although I agree with it otherwise.

Google job scams.

Many of us have found out the hard way why that is wise.

“Nice family people” sure are peddling a lot of scams to exploit the motherload of underemployed citizens who cannot rely on unearned income for womb productivity to pay their rent. In addition to the bullying, cutthroat and very absentee, crony-corrupt ways of the mom gangs across many office job categories, VIRTUE is in short supply in many family-friendly offices, “voted best for moms.”

These things mean nothing in such jobs:

1) attending work every day,

2) staying at work all day,

3) generating more new business accounts than most employees,

4) retaining more accounts than most employees,

5) quota meeting of all types.

These things mean a LOT:

1) participating with gushing enthusiasm in the baby-mommy-look-alike-bulletin-board-decorating contest,

2) gleeful participation & good costumes for the Halloween Dress-up day,

3) adult cubicle Easter egg hunt participation,

4) etc, etc, etc, etc, etc, etc., ad infinitum,

5) advanced bullying skills

a. chanting insults at colleagues who are not “culture fits” with your fellow moms,

b. singing mocking songs about colleagues (government job skill),

c. telling an employee the prize for a mom-themed contest involves getting a colleague “down in the floor and smearing Vaseline all over her shiny, exfoiliated face (management level skill set).

The reason these jobs are so full of idiotic game playing and cutthroatery is because the volume of work is so low, likely due to multiple factors, including low demand for the products AND automation that reduces the processing workload for humans. It is even reducing other types of service work.

Granted, if [most] of the [retained] people in sales jobs were working harder, there would be more work. Because, in prospecting sales, you generate the sales. The managers pump up the salespeople who work hard to keep them selling a lot, which keeps their numbers up despite their frequent babyvacations, and then they churn them, keeping the fellow babyvacationing moms with low numbers in crony-collusion gangs.

But when you work temp jobs that are not prospecting sales jobs at all, but just service-oriented, data entry, underwriting, credit processing, etc., you see the volume issue more clearly. They train TONS of people for these jobs — I have seen as many as 187 temps from different temp
agencies, training for one job — and then, when you get out on the floor, the work is far less voluminous than they anticipated, resulting in a shorter work session.

If it these bigwigs or their offspring counted on these $10-to-$12-per-hour churn jobs to — SOMEHOW — cover a year’s lease agreement on an apartment, it might sink in that the JOBS NUMBERS ARE FAKE NEWS.

A 10-hour-per week job that keeps a single mom below the earned-income limits for 8 different welfare programs and a refundable child tax credit check the size of 4 months of full-time wages is NOT a real job.

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-cr…

A 20-hour-per-week insurance job that an unlicensed mom, married to a man who pays the bills, works to get family vacation or more keeping-up-with-the-Jones’ money is NOT a real job, not even if you hand her a non-refundable child tax credit of several thousand dollars for skipping out of work every day and for weeks at a time for baby travel soccer, with the phones ringing off the hook with paying customers.

For a single / childless citizen with no spousal income and no pay-per-birth monthly welfare or bigly, refundable tax-welfare checks, a full-time temp job or a 1099 gig is a living-in-mom’s-basement job, as are most of the high-turnover jobs that are on the job boards every single month, because you cannot sustain a Lease Agreement on them, much less a mortgage.

Why were these bigwigs—with massive pay grades—so out of touch with what the peasants were facing, including many college-educated serfs? At least they admit that the collapse took them by surprise. It did not take the average Deplorable that they consider to be such an idiot by surprise, nor a non-Deplorable rich guy like Michael Burry, who shorted to the tune of millions by predicting the 2008 collapse. Why was he more aware of the numerical trends that foreshadowed the housing collapse? It is not like he is a serf. He is a rich guy, but not a rich guy who ignored ground-level reality.

Kentucky — per capita income — $18,093

https://en.m.wikipedia.org/wiki/List_of_Kentucky_locations_by_per_capit…

Tennessee — per capita income — $19,393

https://en.m.wikipedia.org/wiki/List_of_Tennessee_locations_by_per_capi…

Alabama — per capita income — $18,189

https://en.m.wikipedia.org/wiki/List_of_Alabama_locations_by_per_capita…

Mississippi — per capita income — $20,670

https://en.m.wikipedia.org/wiki/List_of_Mississippi_locations_by_per_ca…

South Carolina — per capita income — $18,795

https://en.m.wikipedia.org/wiki/List_of_South_Carolina_locations_by_per…

Texas — per capita income — $19,617

https://en.m.wikipedia.org/wiki/List_of_Texas_locations_by_per_capita_i…

Indiana — per capita income — $20, 397

https://en.m.wikipedia.org/wiki/List_of_Indiana_locations_by_per_capita…

West Virginia — per capita income — $23,450

https://en.m.wikipedia.org/wiki/List_of_West_Virginia_locations_by_per_…

That WV is a current number; it is less than $11 per hour. A $12-per-hour job is about $25k.

In reply to by Cognitive Dissonance

YUNOSELL Wed, 12/27/2017 - 16:01 Permalink

I don't believe a single one of them, although I would prefer to think they are that fucking stupid rather than totally corrupt  END THE FED

wisehiney Wed, 12/27/2017 - 15:59 Permalink

You can't judge an apple by looking at a tree,You can't judge honey by looking at the bee,You can't judge a daughter by looking at the mother,You can't judge a book by looking at the cover. You can't fix a debt problem,By going deeper in debt,Over and over,You stupid mutha fuckers

Aeonios Wed, 12/27/2017 - 16:09 Permalink

What we learned: nothing.What we fixed: nothingWhat remains to be done: fuck the economy up some more so we can do it all over again!

Seasmoke Wed, 12/27/2017 - 16:13 Permalink

QE4ever. Allows the criminals to keep the price of Gold down. That was lesson I needed to learn as I foolishly thought the price would go over $20,000USD with QE.

lester1 Wed, 12/27/2017 - 16:16 Permalink

This Bitcoin hysteria is a sign of a very unhealthy financial market flooded with Easy Money Monopoly money from central banks! Callit a mania bought by people on Adderall..

GotAFriendInBen Hurricane Baby Wed, 12/27/2017 - 17:12 Permalink

Exactly.Nobody dared utter that word and alert the public to how badly they were screwed by banks . This is the 21st century. Not the roaring 20'sGreat Recession was easier to "manage" and avoid anything worseBut we're Still in itNever left itSimply riding the wave of debt. No different than Uncle Joe taking out cash advances to keep the Lincoln Continental running

In reply to by Hurricane Baby

moneybots Wed, 12/27/2017 - 16:32 Permalink

" A decade is plenty of time to reflect on what we have learned, what we have fixed, and what remains to be done." Comedy. Glass Steagall was created to prevent what happened again. EVERYBODY knew that and dismantled it anyway- so it could happen again. No lesson was forgotten, just recycled for the benefit of those who made out like bandits.  What is there to be fixed? It was fixed already. It was deliberately unfixed. Thus what remains to be done? It was already done and intentionally undone for the benefit of a select group of people.

Not if_ But When Wed, 12/27/2017 - 16:33 Permalink

If you ask a typical Hillary voter what they think the cause of the Great Recession/Financial Crisis was - you will be astounded by the absence of even a basic clue.  They lack even a rudimentary understanding of the causes.  Yet they term people who voted for Trump or didn't vote for cobweb cunt to be ___________.      CPL 593H

Batman11 Wed, 12/27/2017 - 16:45 Permalink

There was so much to learn from Japan’s real estate bust in the early 1990s.Nothing was learnt.There was so much to learn from US’s real estate bust in 2008.It was a “black swan”, nothing was learnt.Let’s look at unproductive lending in the US economy:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png Unproductive lending builds up in the economy and leads to financial crises like 1929 and 2008.Let’s look at unproductive lending in the UK economy:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.pngUnproductive lending builds up in the economy and leads to a financial crisis in 2008.Someone did get to work after Japan blew up and has worked it all out.Bank credit (lending) creates money.https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdfThe three types of lending: 1)   Into business and industry - gives a good return in GDP and doesn’t lead to inflatio 2) To consumers – leads to consumer price inflation  3) Into real estate and financial speculation – leads to asset price inflation and gives a poor return in GDP and shows up in the graph of debt-to-GDPThis is where the bubbles come from.Less than 20% of lending in the US and UK goes into business and industry. Productive lending that doesn’t cause problems. Richard Werner explains in 15 mins:https://www.youtube.com/watch?v=EC0G7pY4wRE&t=3sEffective regulation comes from understanding how banks create money and the current, Basel,  regulations assume banks are financial intermediaries, they are no good.

Batman11 Batman11 Wed, 12/27/2017 - 16:46 Permalink

Now we have a got a better idea what banks do, we can see why Glass-Steagall was so effective.1929 – before Glass - Steagall2008 – after Glass – SteagallGlass-Steagall separated the money creation side of banking from the investment side of banking. It also stopped the money creation side of banking from trading in securities.When the money creation side of banking can only trade in real assets there are limits on its money creation.When the money creation side of banking can trade in securities produced by the investment side, the sky’s the limit and only dependent on the ingenuity of investment bankers in coming up with new securities. They got to work producing CDO squareds, synthetic CDOs, etc .... knowing there was a ready market that can create money out of nothing.The banks buy the securities off each other with money they create out of nothing and you have a ponzi scheme.https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.pngThe data shows the 1920s investment bankers were more ingenious and creative leading up to 1929. Look at them go.

In reply to by Batman11

Batman11 Batman11 Wed, 12/27/2017 - 16:48 Permalink

Policymakers, central bankers and mainstream economits are neoliberal ideologues and they are stuck in an ideological rut. While they are stuck, you can overtake. A group has grown up to start looking at the problems as the mainstream economists are so resistant to change, the Council on Economic Policies. William White (BIS, OECD) has seen these problems building since the first Greenspan “put” in 1987. https://www.youtube.com/watch?v=g6iXBQ33pBo&t=2485s Adair Turner looks at the problems and can see a way forward in a debt saturated world. https://www.youtube.com/watch?v=LCX3qPq0JDA Adair Turner talks of the Chicago Plan which was put forward in the 1930s when they faced the debt deflation of the Great Depression. The IMF have done a recent investigation into the Chicago Plan and can see its merits. http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf  Other new kids on the economic block ........ Steve Keen – Minsky moments and affects of debt on the economy Richard Koo – After the Minsky Moment, studied 1929, Japan 1989 and 2008. Richard Werner - Money and debt, bank credit and how it must be allocated for economic success, studying Japan around 1989 Michael Hudson – The history of economics, the difference between earned and unearned income There is plenty free on YouTube - try before you buy. Often the stuff on YouTube is easier to understand than the books. Only Michael Hudson has a clear writing style. Richard Koo's stuff on YouTube is so clear; I couldn't see the point in buying the book. A good start to Richard Koo. https://www.youtube.com/watch?v=8YTyJzmiHGk Financial stability in 15 mins. from Richard Werner https://www.youtube.com/watch?v=EC0G7pY4wRE&t=3s Central bankers, those Basel rules don’t work.  

In reply to by Batman11

silverserfer Wed, 12/27/2017 - 17:40 Permalink

its a generational thing. its the millenials turn to take it big in the ass. its coming.. They always wait for the fish to swallow the hook before they set it. 401k contrubutions for these kids is robust. dumb money abounds. maybe it will build some charcter and get them to put their phones down for a few minuites

Let it Go Wed, 12/27/2017 - 21:02 Permalink

During the last two and a half years central banks and countries around the world have added more fuel to the fire which has postponed the day of reckoning. This has made all of us thinking the market was about to turn south looking rather silly and underlines the fact that trying to time events is both confusing and complex, this is especially true when it comes to the financial part of our lives.When it comes to economics, this means it is best not to have a great deal of faith in our economic system which is severely flawed. Central banks can stack the deck but when it gets too high and begins to fall they may not be able to control the direction or who it will crush. The article below explores the idea that thinking the economy will adjust and grow its way out of many problems we have tried so hard to ignore deifies what history has taught us. http://Hard-landing Scenario Remains Very Possible.html