Five years later, and they’re still smiling!
The quants promised this house of cards couldn’t fall apart, because mortgage markets were regional, and that all of them couldn’t possibly fall at once. But that’s what happens with a bubble; it pops. And the extra layers of credit derivatives turned what could have been a somewhat more manageable crisis similar to the housing crash of the 1980s into a massive collapse. Everybody made bets with everybody – a system known as “shadow banking,” invisible to regulators – and then everybody bought insurance on them. And the insurers had no money in reserve; think AIG. Faulty links in this chain of borrowing reverberated through the system; once Lehman went bankrupt, nobody wanted to lend to anyone else because of the risk of default. Because banks relied on short-term lending, this lending freeze meant that even non-financial companies had no funds to make their payrolls.
In summary, the financial industry collectively decided that you could fund economic growth despite stagnant wages through piling on mountains of debt. But when it all went bad, the solution wasn’t to rebalance the economy, to get money into the hands of ordinary workers and preference wages over assets. The solution was to point a fire hose of money at the people who caused the problem, and inflate their assets to preserve the status quo. The Federal Reserve’s emergency lending and then quantitative easing rescued bank balance sheets. The five biggest U.S. banks are now 30 percent bigger than they were at the height of the crisis, nursed back to health by the government. Anyone who tells you TARP worked is looking at a tiny fraction of multi-trillion-dollar government support. And TARP didn’t translate support for the banks into the regular economy. Banks used the TARP program for foreclosure mitigation as a predatory lending system to trap borrowers. Lending for businesses did not increase.
Worst of all, despite a crisis built on fraud, nobody who perpetrated that fraud saw the inside of a jail cell, removing any meaningful deterrent for financial crimes. Most of those criminals walked away with enough money to fund their lavish lifestyles forever. The Justice Department recently had to admit that they inflated their own statistics on financial fraud prosecutions, and they disgracefully tried to re-insert the revised stats into old speeches to cover their tracks. I guess fraud is contagious.