US: Anniversary of the Worst Crisis

On Monday, President Barack Obama marked the fifth anniversary of the beginning of the financial crisis with a speech at the White House, in which he said that his main priority remains “reconstructing” the economy. “It’s hard sometimes to remember everything that happened” on Wall Street, he said, indicating that the crisis was “a perfect storm” that affected millions and saw the “erosion” of the middle class especially.

Here is the history:

Exactly five years ago, one of the largest investment banks in the world, Lehman Brothers, collapsed; its end marked the beginning of the biggest financial crisis since the Great Depression, but it was not the cause. The financial crisis had already begun in the United States in December 2007, seven months before the fall of Lehman.

It was the confluence of several factors that produced it: the granting of loans by banks to customers who did not deserve them, the poor work of the agencies that serviced the debt, lax financial regulation and a series of public incentives that encouraged making loans and borrowing. In other words, easy money and the apparent excess liquidity swelled the bubble during expansion until it exploded.

On Sept. 15, 2008, Lehman Brothers went bankrupt, which caused a devastating blast — the New York Stock Exchange plunged more than 40 percent — that forced the government to open the tap of aid to save its financial system.

Washington offered unlimited assistance to the semi-public mortgage lenders Fannie Mae and Freddie Mac, came to the rescue of the insurance giant American International Group and then launched lifesavers to none other than Bank of America and CitiGroup, said Sandro Pozzi.

The Federal Reserve estimated $12.6 billion as the amount mobilized to stabilize the financial sector, which was more than 80 percent of gross domestic product in 2007, not to mention that interest rates have been stuck at 0 percent since December 2008 and three rounds of stimulus have caused the Fed’s balance to multiply fourfold.

Five years later, the rescue plan for the bank has a profit of about $27.6 billion. However, it did not include the falling of the middle and working classes.

Four years after the official end of the recession, there are 11.3 million unemployed and 10.6 million underemployed individuals — forced to work part-time — or who have declared job prospects fruitless.

The recovery from the dramatic collapse with the fall of Lehman Brothers has been inequitable among the population. A study conducted by The Associated Press, National Opinion Research Center and Center for Public Affairs Research concludes that the gap between rich and poor is growing more and more.

“This was no ‘equal opportunity’ recession or an ‘equal opportunity’ recovery,” said Andrew Sum, director of the Center for Labor Market Studies at Northeastern University in Boston, Mass. “One part of America is in depression, while another part is in full employment.”

While low-income families — those that earn $20,000 or less a year — have reached an unemployment rate of 21 percent, high-income families — those that earn $150,000 or more annually — have an unemployment rate of 3.2 percent. This disparity between rich and poor provides the first data that show to what extent the employment factor has contributed to the erosion of the middle class, the report continues.

For the Nobel laureate, economist Paul Krugman, government policy since Lehman has been an “immense failure.” The Fed continues pumping money into the economy through bonds purchased for $85 billion a month and maintains extremely low rates.

Krugman calls for a “massive boost” to employment — that is, give a strong enough impetus to job creation to offset the effects of the economic recession and postpone the fiscal austerity measures and tax increases until the private sector is ready to take over the relief efforts.

The report on the creation of 169,000 jobs in August was not bad, he says. But keeping in mind the depression that continues in the economy, the truth is that we should be creating more than 300,000 jobs a month, not less than 200,000. As the Economic Policy Institute signals, we need more than five years of employment growth at this rate to return to the unemployment level that prevailed before the Great Recession.

Why is the reduction of the unemployment rate not a top political priority?

“[Because of] the policy elite’s damaging obsession with budget deficits,” says Krugman, “an obsession that led governments to cut investment when they should have been raising it, to destroy jobs when job creation should have been their priority.”

Alberto Ampuero is a journalist in Riverside, California.