A safer fi­nan­cial sys­tem, yet much hasn’t changed

Daily Local News (West Chester, PA) - - BUSINESS - The As­so­ci­ated Press

On the brink of crum­bling a decade ago, Amer­ica’s fi­nan­cial sys­tem was saved by an ex­tra­or­di­nary res­cue that re­vived Wall Street and the econ­omy yet did lit­tle for in­di­vid­u­als who felt duped and left to suf­fer from the reck­less bets of gi­ant bank­ing in­sti­tu­tions.

The gov­ern­ment in­ter­ven­tion shored up the bank­ing sys­tem, al­lowed credit to flow freely again and helped set the econ­omy on a path to­ward a painfully slow but last­ing re­cov­ery from the Great Re­ces­sion.

In the process, though, mil­lions en­dured job losses, fore­clo­sures and a loss of fi­nan­cial se­cu­rity and strug­gled to re­cover with lit­tle out­side help. For many, faith in home­own­er­ship, the fi­nan­cial mar­kets and a gov­ern­ment-pro­vided se­cu­rity net never quite felt se­cure again.

Even with the econ­omy roar­ing this year, 62 per­cent of Amer­i­cans say the coun­try is head­ing in the wrong di­rec­tion, ac­cord­ing to an Au­gust sur­vey by The As­so­ci­ated Press and the NORC Cen­ter for Pub­lic Af­fairs Re­search.

Still, by pretty much any mea­sure, the pic­ture was far bleaker a decade ago. Home prices had sunk, and mort­gages were go­ing un­paid. Lay­offs had be­gun to spike. The tremors in­ten­si­fied as Lehman Broth­ers, a ti­tan of Wall Street, sur­ren­dered to bank­ruptcy on Sept. 15, 2008. Stock mar­kets shud­dered and then col­lapsed in a panic that U.S. gov­ern­ment of­fi­cials strug­gled to stop.

Des­per­ate, the gov­ern­ment took steps never tried be­fore. It flooded the econ­omy with $1.5 tril­lion in stim­u­lus over five years. To keep loan rates low, the Fed­eral Re­serve slashed its bench­mark rate to a record­low near zero and bought tril­lions in Trea­surys and mort­gage bonds. Stricter rules, in­tended to pre­vent a fu­ture catas­tro­phe, were passed.

Stocks not only re­cov­ered; they soared. Un­em­ploy­ment plunged from 10 per­cent to the cur­rent 3.9 per­cent, near a 50-year low.

The stock mar­ket gains, though, flowed mostly to the al­ready af­flu­ent. Home­own­er­ship, the pri­mary source of wealth for most Amer­i­can house­holds, de­clined.

And while risky mort­gages are much less com­mon, stu­dent debt has ex­ploded. Anx­i­ety per­sists as racial and po­lit­i­cal ten­sions have in­ten­si­fied in a na­tion that is in­creas­ingly di­verse and cleft by a widen­ing wealth gap. tax­pay­ers had col­lec­tively res­cued the na­tion’s big­gest banks to the tune of $700 bil­lion. The bailout trig­gered pub­lic anger and calls for the gov­ern­ment to break up the na­tion’s big­gest banks. It didn’t. A decade later, the largest banks are even big­ger than they were then. They’ve long since re­paid their bailouts. JPMor­gan Chase, Wells Fargo, Bank of Amer­ica — all gi­ants be­fore the cri­sis — are still the na­tion’s largest.

Po­lit­i­cally, banks are once again ex­ert­ing out­size in­flu­ence in Wash­ing­ton, per­suad­ing the Repub­li­can-led Congress to be­gin eas­ing the tighter reg­u­la­tions that were im­posed on them af­ter the cri­sis. And prof­its have never been higher. The Fed­eral De­posit In­sur­ance Cor­po­ra­tion says the na­tion’s banks earned $60.2 bil­lion in the sec­ond quar­ter — an in­dus­try record.

The gov­ern­ment now ap­plies “stress tests” to the largest fi­nan­cial in­sti­tu­tions. The idea is to as­sure the fi­nan­cial world that the bank­ing sys­tem re­mains sound and that any cri­sis can be con­tained.

Un­der the tests, the gov­ern­ment has gen­er­ally found that the na­tion’s 35 largest banks could with­stand a plung­ing stock mar­ket, cra­ter­ing home prices and surg­ing un­em­ploy­ment. Not ev­ery­one sees the tests as rig­or­ous enough. At a con­fer­ence this month, Larry Sum­mers, a Har­vard Univer­sity econ­o­mist and for­mer Trea­sury sec­re­tary, called them “com­i­cally ab­surd.”

When the fi­nan­cial cri­sis erupted, the Cen­sus Bureau re­ported that nearly 68 per­cent of Amer­i­cans were home­own­ers. That fig­ure sank as mil­lions faced fore­clo­sure, spik­ing un­em­ploy­ment left many with­out sav­ings for a down pay­ment and home­builders scaled back con­struc­tion.

Just 64 per­cent of Amer­i­cans owned homes as of mid2018.

The down­turn sent U.S. home prices tum­bling, but the Case-Shiller in­dex of home prices be­gan re­cov­er­ing in early 2012. Home val­ues have been climb­ing at roughly dou­ble the pace of wage growth in re­cent years. The re­sult is that many would-be buy­ers can’t af­ford a home they would want and must in­stead rent.

In most ar­eas — and with­out ad­just­ing for in­fla­tion — home prices na­tion­ally are at or above what they were in 2008. The pro­por­tion of home­own­ers who owe more on their mort­gage than their home is worth has re­turned to near-nor­mal lev­els. And fore­clo­sures are back to a more typ­i­cal pre-cri­sis rate.

Those who sur­vived the hous­ing meltdown in good stand­ing have pros­pered. Av­er­age 30-year mort­gage rates plunged from roughly 6 per­cent to as low as 3.3 per­cent, ac­cord­ing to mort­gage buyer Fred­die Mac. Some peo­ple used the lower rates to re­fi­nance their mort­gages and save money. As a re­sult, the Cen­sus said the me­dian monthly cost for a home­owner was $1,491 in 2016 — roughly $170 less than in 2010.

Still, the re­cov­ery has been un­even. In such mar­kets as Los Angeles, Dal­las and Den­ver, home prices have eclipsed their pre-cri­sis highs the past decade. Oth­ers — Chicago, Bal­ti­more and Phoenix, among them — re­main well be­low their peak prices.

Be­fore the cri­sis, many lenders of­fered a bevy of risky loans that fre­quently cleared bor­row­ers for fi­nanc­ing even if they had no proof of in­come or no money for a down pay­ment. Many such loans were in­ter­est-rate time bombs that let buy­ers pay lit­tle in the first few years of home­own­er­ship and that then smacked them with a hefty mort­gage pay­ment in­crease.

Banks had lit­tle in­cen­tive to en­sure that bor­row­ers had the means to af­ford pay­ments. That’s be­cause the lenders promptly bun­dled and resold the home loans to Wall Street via what was then a vi­brant, pri­vate sec­ondary mar­ket for home loans.

Ten years later, it’s a dif­fer­ent story. The un­der­writ­ing rules that banks must fol­low for their loans to be con­sid­ered “qual­i­fied” to be bought by the gov­ern­ment have been tight­ened.

In­come in­equal­ity has wors­ened over the past decade — an is­sue that has an­gered and frus­trated vot­ers who view the econ­omy as be­ing rigged against them. Much of the in­creased wealth gap re­flected the na­ture of a re­cov­ery that de­pended on a stock mar­ket boom made pos­si­ble, in part, by the Fed’s slash­ing rates to near-zero to help pull the econ­omy out of its tail­spin.

Be­cause wealth­ier Amer­i­cans own the bulk of U.S. stocks, they reaped the ben­e­fits. They were also less likely to lose a house and more likely to keep a job. Re­search has found that they also spent more on ed­u­ca­tion for their chil­dren. That helps set up an­other gen­er­a­tion of in­come in­equal­ity be­cause in­vest­ments in school­ing tend to lead to higher fu­ture in­comes.

Last year, the top 5 per­cent of house­holds earned an av­er­age in­come of $385,389, ac­cord­ing to the Cen­sus Bureau. That is 6.26 times more than the av­er­age in­come of $61,564 for the mid­dle 40 to 60 per­cent of house­holds. Back in 2008, the top 5 per­cent made 5.88 times more than mid­dle-in­come Amer­i­cans.

This re­cov­ery is rad­i­cally dif­fer­ent from the af­ter­math of the Great De­pres­sion, the event that many econ­o­mists con­sider to be com­pa­ra­ble to the 2008 fi­nan­cial meltdown. The pro­por­tion of wealth con­trolled by the top 10 per­cent be­gan to de­cline af­ter 1932, a trend that stretched for decades un­til 1986. But af­ter the Great Re­ces­sion, the pro­por­tion of wealth held by the top 10 per­cent rose.

In the months af­ter the cri­sis erupted, stock prices tum­bled like so many domi­noes. Gov­ern­ment of­fi­cials, bankers and econ­o­mists warned of a con­ta­gion in which the cri­sis that orig­i­nated with bad home loans would seep from Wall Street to pub­licly listed com­pa­nies and small town busi­nesses.

The fi­nan­cial shock­wave struck Europe, Asia and prac­ti­cally every­where else. The Fed did what it could to sta­bi­lize mar­kets. It slashed its key short-term rate and bought gov­ern­ment debt and mort­gage-backed se­cu­ri­ties to force down longert­erm loan rates.

The Dow Jones In­dus­trial Av­er­age bot­tomed in early 2009 af­ter hav­ing shed half its value. By early 2013, it had sur­passed its pre­vi­ous high. And stocks kept climb­ing. In­vestors no longer worry as they once did that the fi­nan­cial sys­tem will im­plode. Yet de­spite the stock-price gains, there still isn’t much wide­spread trust in the mar­ket.

Last year, even when the S&P 500 was rid­ing a pow­er­ful up­surge, in­vestors put $186 bil­lion into stock funds, ac­cord­ing to the In­vest­ment Com­pany In­sti­tute. They showed less ea­ger­ness than in 2007, just be­fore the Great Re­ces­sion, when in­vestors poured in $201 bil­lion into stocks.

Stock hold­ings are still con­cen­trated among the wealth­i­est Amer­i­cans — even more than on the eve of the re­ces­sion. Among fam­i­lies in the top 10 per­cent by in­come, 95 per­cent own stocks, ac­cord­ing to the Fed.

The typ­i­cal fam­ily in the top 10 per­cent by in­come had $363,400 in stock in­vest­ment as of 2016. The typ­i­cal mid­dle-in­come fam­ily — be­tween the 40th and 60th per­centile — has only $15,000 in stock in­vest­ments, down from $20,200 in 2007. Stu­dent debt has ex­ploded — shoot­ing up 131 per­cent in the past decade to $1.4 tril­lion, ac­cord­ing to the New York Fed­eral Re­serve.

The 2008 fi­nan­cial cri­sis reshuf­fled the sources of con­sumer debt. Ed­u­ca­tion loans sup­planted the out­size role that credit cards and auto loans had pre­vi­ously played in house­hold bud­gets. Though mort­gage debt re­mains the dom­i­nant source of con­sumer debt, it’s de­clined in the past decade from $10 tril­lion to $9.4 tril­lion.

Af­ter the re­ces­sion, more Amer­i­cans needed to bor­row for col­lege and grad­u­ate school. Fam­i­lies had less money to pay for their chil­dren’s ed­u­ca­tion. And many un­em­ployed peo­ple went to school with the be­lief that a col­lege de­gree would re­ward them more fi­nan­cial se­cu­rity. The av­er­age col­lege-ed­u­cated fam­ily owed $47,700 on ed­u­ca­tion loans in 2016, up from an in­fla­tion­ad­justed $36,300 in 2007, ac­cord­ing to the Fed­eral Re­serve’s sur­vey of con­sumer fi­nances.

The rush of stu­dent loans isn’t all neg­a­tive, of course. Amer­i­can work­ers emerged from the re­ces­sion with more ed­u­ca­tion and knowhow. And a col­lege de­gree has his­tor­i­cally cor­re­sponded with lower un­em­ploy­ment. But heavy stu­dent debt tends to de­lay such crit­i­cal fi­nan­cial milestones as mar­riage, home own­er­ship and par­ent­hood.

As the econ­omy tanked, it be­came ob­vi­ous that reg­u­la­tors had over­looked wildly reck­less prac­tices by banks, mort­gage lenders and oth­ers that had trig­gered the re­ces­sion. Crit­ics ar­gued that fed­eral of­fi­cials had even en­abled the bad be­hav­ior.

In 2010, Pres­i­dent Barack Obama and the Demo­cratic ma­jor­ity in Congress ap­proved a sweep­ing over­haul of fi­nan­cial rules. Their goal was to stop an­other meltdown so a fail­ing bank could no longer sab­o­tage an en­tire econ­omy and stick tax­pay­ers with the bill

The Dodd-Frank law em­pow­ered reg­u­la­tors to, among other things, close ma­jor banks with­out re­sort­ing to bailouts. Risky lend­ing was curbed. Shad­owy fi­nan­cial mar­kets en­coun­tered new su­per­vi­sion. And a new agency, the Con­sumer Fi­nan­cial Pro­tec­tion Bureau, was au­tho­rized to pro­tect con­sumers from abu­sive fi­nan­cial prod­ucts. The CFPB took the lead in polic­ing mort­gages, credit cards, payday lend­ing and, stu­dent loans, among other items.

But with the elec­tion of Don­ald Trump, many such rules are be­ing un­wound. Trump em­braced the view of many Repub­li­cans and busi­ness groups that Dod­dFrank, with its stricter and costly new rules, had sti­fled eco­nomic growth. Congress has since eased many of the key re­straints on banks.

In the mean­time, en­force­ment ac­tions by the CFPB have been cur­tailed. The lead­er­ship team Trump in­stalled, among other things, weak­ened the CFPB of­fice that fo­cuses on dis­crim­i­na­tion in lend­ing. And all the agency’s op­er­a­tions have come un­der re­view for pos­si­ble over­haul. The fi­nan­cial cri­sis and the re­ces­sion that fol­lowed left such a deep scar on those who lived through it that it forced Amer­i­cans to take a truly rad­i­cal step: Spend less.

Con­sumer spend­ing fell dur­ing the Great Re­ces­sion and has grown only slightly ever since. In the 30 years be­fore the re­ces­sion, con­sumer spend­ing in­creased by an av­er­age of 3.4 per­cent an­nu­ally. By con­trast, in the first eight years af­ter the re­ces­sion, from 2010 through 2017, it’s risen just 2.3 per­cent a year.

Amer­i­cans are even sav­ing a bit more. The sav­ings rate av­er­aged 7 per­cent in the first six months of 2018, up from a low of 2.5 per­cent in 2005 at the height of the hous­ing boom. Many econ­o­mists say the higher sav­ings and lower spend­ing growth show that the trauma of the fi­nan­cial cri­sis still haunts many con­sumers de­spite gains in wealth. This trend sug­gests that they re­gard hous­ing and stock mar­ket wealth as more pre­car­i­ous than in the past.


In this Sept. 17, 2008 file photo, trader Christo­pher Crotty rubs his eyes as he works on the floor of the New York Stock Ex­change.

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