There's a long way to go before the economy, and people, recover from wounds inflicted by the financial meltdown. The value of homeowners' equity -- most Americans' biggest single financial asset -- is down $4.7 trillion, about 41%, since June 2007, according to the Federal Reserve. The U.S. stock market has lost $1.9 trillion of value, by Wilshire Associates' count. Even worse, we've got fewer people working now -- 142.3 million -- than then (146.1 million), even though the working-age population has grown. So while plenty of folks are doing well and entire industries have recovered, people on average are worse off than they were. Bad stuff.
How should you think about the past five years? What can we learn from them? And what can we as a society do to minimize the chances of a recurrence?
I've been writing about the financial meltdown and its aftermath almost continually since I joined Fortune the month after the symptoms surfaced. Now, five years into the problem, I find myself getting increasingly angry and frustrated watching myth supplant reality about what happened, and seeing fantasy displace common sense when it comes to fixing the problems that got us in this mess.
Ready? Okay, here we go.
Myth No. 1: The government should have done nothing.
! During the dark days of 2008-09, when giant institutions like Washington Mutual and Wachovia and Lehman Brothers failed and the likes of Citigroup (C), Bank of America (BAC), AIG (AIG), GE Capital (GE), Merrill Lynch, Morgan Stanley (MS), Goldman Sachs (GS), and huge European banks were near collapse, letting them all go under would have brought on the financial apocalypse. We could well have ended up with a downturn worse than the Great Depression, which was the previous time that failures in the financial system (rather than the Federal Reserve raising rates) begat a U.S. economic slowdown.
You want to let big institutions fail? Okay, look at what happened when Lehman was allowed to go under in September 2008. (The Treasury and Fed insist there was no way to save the firm, though I wonder if they would have devised one had they not gotten tons of grief six months earlier for not letting Bear Stearns collapse.)
Lehman's collapse froze short-term money markets, making normal finance impossible. A run on money-market funds began when the Reserve Primary Fund, an industry pioneer, said it was "breaking the buck" because of losses on Lehman paper. Goldman Sachs and Morgan Stanley were about to fail because hedge funds and other "prime brokerage" customers began yanking their cash in response to prime brokerage assets at Lehman's London branch being frozen.
The federal government (including the Fed) had to front trillions of dollars and guarantee trillions of obligations -- a total I calculated last year (see "Surprise! The Big Bad Bailout Is Paying Off") at more than $14 trillion -- to stop the panic.
Lehman was a beta test for letting markets take care of problems themselves -- and it failed miserably.
Myth No. 2: The government bailed out shareholders.
It's patently unfair that lenders to these companies escaped unscathed, as did counterparties to AIG, which were paid with taxpayer money. Why did the government do the right thing at GM (GM) and Chrysler, where it forced creditors to take haircuts before financing the companies' reorganizations, and the wrong thing by bailing out creditors at financial companies?
The Treasury contends that whacking financial company creditors would have created more problems than it solved. "In a severe financial crisis," said a very senior Treasury official whom I agreed not to name, "the primary obligation is to prevent panics and the severe economic damage they cause to the innocent. In those crises, if you hair-cut the creditors of a systemically important institution, it's like adding accelerant to a burning fire."
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