Econ­omy Hard Lessons From the 2008 Melt­down

The crit­i­cal lessons we failed to learn from the fi­nan­cial cri­sis

Newsweek - - Contents - BY ROBERT RE­ICH @Rbre­ich

Ten years ago, after mak­ing piles of cash gam­bling with other peo­ple’s money, Wall Street nearly im­ploded, and the out­go­ing Ge­orge W. Bush and in­com­ing Obama ad­min­is­tra­tions bailed out the bankers.

Amer­ica should have learned three big lessons from the cri­sis. We didn’t, to our con­tin­u­ing peril.

First les­son: Bank­ing is a risky busi­ness with huge up­sides for the few who gam­ble in it, but even big­ger down­sides for the many when those bets go bad. That means that safe­guards are nec­es­sary.

The pro­tec­tions cre­ated after Wall Street’s 1929 crash worked for over four decades. They made bank­ing bor­ing. But start­ing in the 1980s, a num­ber of safe­guards were wa­tered down or re­pealed be­cause of Wall Street’s in­creas­ing thirst for prof­its and its grow­ing po­lit­i­cal clout. As politi­cians from both par­ties grew de­pen­dent on the Street for cam­paign fund­ing, the rush to dereg­u­late turned into a stam­pede. It be­gan in 1982, when Congress and the Rea­gan ad­min­is­tra­tion dereg­u­lated sav­ings and loan as­so­ci­a­tions—al­low­ing them to en­gage in risky com­mer­cial lend­ing, while con­tin­u­ing to guar­an­tee them against ma­jor losses. Not sur­pris­ingly, the banks got into big trou­ble, ne­ces­si­tat­ing a tax­payer-funded bailout.

The next mile­stone came in 1999, when Congress and the Clin­ton ad­min­is­tra­tion, un­der then–trea­sury Sec­re­tary Robert Rubin, re­pealed the Glass-stea­gall Act—a 1933 law that had pro­hib­ited banks from gam­bling with com­mer­cial de­posits. (For the record, I served as la­bor sec­re­tary in the Clin­ton ad­min­is­tra­tion but was no longer in the Cab­i­net at this point.)

Then in 2000, Congress and Clin­ton barred the Com­mod­ity Fu­tures Trad­ing Com­mis­sion from reg­u­lat­ing most over-the-counter de­riv­a­tive con­tracts, in­clud­ing credit de­fault swaps (one of the com­pli­cated fi­nan­cial in­stru­ments at the heart of the 2008 melt­down). The coup de grace came in 2004, when Ge­orge W. Bush’s Se­cu­ri­ties and Ex­change Com­mis­sion al­lowed in­vest­ment banks to hold less cap­i­tal in re­serve. Then came the 2008 crash, which was fol­lowed by an­other at­tempt to im­pose safe­guards—the Dodd-frank Act.

And now? The Street’s po­lit­i­cal clout is as great as ever, which ex­plains why the Dodd-frank re­stric­tions are now be­ing wa­tered down—clear­ing the way for an­other cri­sis.

The se­cond les­son we should have learned but didn’t con­cerned widen­ing in­equal­ity. In the decades lead­ing up to 2008, stag­nant wages caused many Amer­i­cans to go deep into debt—us­ing the ris­ing val­ues of their homes as col­lat­eral. (Much the same thing had hap­pened in the years lead­ing up to 1929.)

Wall Street banks were de­lighted to ac­com­mo­date—lend­ing willynilly and of­ten in preda­tory ways—un­til the hous­ing and debt bub­bles burst. And now? The un­der­ly­ing prob­lem of stag­nant wages, with most eco­nomic gains go­ing to the top, is still with us. Once again, con­sumers are deep in debt, invit­ing an­other cri­sis. The third big les­son we didn’t learn con­cerned the rig­ging of Amer­i­can pol­i­tics. After the Great Re­ces­sion, many Amer­i­cans re­al­ized Wall Street, big cor­po­ra­tions and the wealthy had es­sen­tially bought

up our democ­racy. Amer­i­cans saw fi­nan­cial firms get bailed out, while home­own­ers, sud­denly ow­ing more on their homes than the homes were worth, got lit­tle or noth­ing. Mil­lions lost their jobs, sav­ings, pen­sions and homes, but fi­nanciers and big in­vestors came out richer than be­fore. Bankers who com­mit­ted se­ri­ous fraud es­caped ac­count­abil­ity. Big banks like Wells Fargo con­tin­ued to break laws with im­punity.

Many of­fi­cials in­volved in dereg­u­lat­ing the Street be­came top ex­ec­u­tives in the banks that ben­e­fited from dereg­u­la­tion. Some in­volved in writ­ing the Dodd-frank Act are now em­ployed by the same fi­nan­cial in­sti­tu­tions that are wa­ter­ing it down. Mean­while, big cor­po­ra­tions and wealthy in­di­vid­u­als have con­tin­ued to flood Wash­ing­ton with money, mak­ing it the cap­i­tal of “crony cap­i­tal­ism.”

Wide­spread out­rage at all this fu­eled the Tea Party on the right and, briefly, the Oc­cupy move­ment on the left. Both even­tu­ally mor­phed into the two anti-es­tab­lish­ment can­di­da­cies of 2016—au­thor­i­tar­ian pop­ulist Don­ald Trump and demo­cratic pop­ulist Bernie San­ders.

And now? Anti-es­tab­lish­ment fury re­mains the strong­est force in Amer­i­can pol­i­tics. Trump has been us­ing it to con­jure up racist and xeno­pho­bic con­spir­a­cies and to cre­ate the most au­thor­i­tar­ian regime in mod­ern Amer­i­can his­tory. He promised to “drain the swamp” but has made it big­ger and filth­ier.

Democrats don’t know whether to sim­ply op­pose Trump and his au­thor­i­tar­i­an­ism, or get be­hind a re­form agenda to wrest con­trol of pol­i­tics and the econ­omy from the mon­eyed in­ter­ests. But to do the lat­ter, they’d have to take on those that have funded them for decades. I wish I had more con­fi­dence they will.

Sad to say, 10 years after the fi­nan­cial cri­sis, we seem to have learned very lit­tle. Only worse: We now have Trump.

Ơ Robert Re­ich is the chan­cel­lor’s pro­fes­sor of pub­lic pol­icy at the Univer­sity of Cal­i­for­nia, Berke­ley, and a se­nior fel­low at the Blum Cen­ter for De­vel­op­ing Economies. He served as sec­re­tary of la­bor in the Clin­ton ad­min­is­tra­tion.

“Wall Street’s po­lit­i­cal clout is as great as ever, which ex­plains why bank­ing re­stric­tions are be­ing wa­tered down—clear­ing the way for an­other cri­sis.”

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