When the US investment bank Lehman Brothers collapsed in 2008, triggering the worst global financial crisis since the Great Depression, a broad consensus about what caused the crisis seemed to emerge. A bloated and dysfunctional financial system had misallocated capital and, rather than managing risk, had actually created it. Financial deregulation – together with easy money – had contributed to excessive risk-taking. Monetary policy would be relatively ineffective in reviving the economy, even if still-easier money might prevent the financial system’s total collapse. Thus, greater reliance on fiscal policy – increased government spending – would be necessary.
Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned. The European Union is just emerging from a double-dip (and in some countries a triple-dip) recession, and some member states are in depression. In many EU countries, GDP remains lower, or insignificantly above, pre-recession levels. Almost 27 million Europeans are unemployed.
Similarly, 22 million Americans who would like a full-time job cannot find one. Labor-force participation in the US has fallen to levels not seen since women began entering the labor market in large numbers. Most Americans’ income and wealth are below their levels long before the crisis. Indeed, a typical full-time male worker’s income is lower than it has been in more than four decades.
Yes, we have done some things to improve financial markets. There have been some increases in capital requirements – but far short of what is needed. Some of the risky derivatives – the financial weapons of mass destruction – have been put on exchanges, increasing their transparency and reducing systemic risk; but large volumes continue to be traded in murky over-the-counter markets, which means that we have little knowledge about some of our largest financial institutions’ risk exposure.
Likewise, some of the predatory and discriminatory lending and abusive credit-card practices have been curbed; but equally exploitive practices continue. The working poor still are too often exploited by usurious payday loans. Market-dominant banks still extract hefty fees on debit- and credit-card transactions from merchants, who are forced to pay a multiple of what a truly competitive market would bear. These are, quite simply, taxes, with the revenues enriching private coffers rather than serving public purposes.
Other problems have gone unaddressed – and some have worsened. America’s mortgage market remains on life-support: the government now underwrites more than 90% of all mortgages, and President Barack Obama’s administration has not even proposed a new system that would ensure responsible lending at competitive terms. The financial system has become even more concentrated, exacerbating the problem of banks that are not only too big, too interconnected, and too correlated to fail, but that are also too big to manage and be held accountable. Despite scandal after scandal, from money laundering and market manipulation to racial discrimination in lending and illegal foreclosures, no senior official has been held accountable; when financial penalties have been imposed, they have been far smaller than they should be, lest systemically important institutions be jeopardized.