[When]Lehman Brothers failed 10 years ago[, t]he U.S. economy was already in a recession... 6.5 mil. jobs would be lost over the next year. It was a terrifying time.
Still, we didn’t experience a full replay of the Great Depression, and some have argued that
the system worked...
But this is only half right. We avoided utter disaster, but nonetheless experienced a huge, sustained employment slump... Why did the slump go on so long?
There are multiple answers, but the most important factor was politics — cynical, bad-faith obstructionism on the part of the Republican Party.
...
Unemployment rose to almost 10%, then came down
with painful slowness; it didn’t get back to 5% until seven years after Lehman’s fall. Why didn’t rapid financial recovery lead to rapid economic recovery?
At a basic level, the answer is that the financial crisis was only one symptom of a bigger problem: the collapse of a gigantic housing bubble. The bursting bubble exerted a powerful downdraft on the economy, both because it led to a
plunge in residential investment and because it was a
huge hit to household wealth, which reduced consumer spending.What the crisis called for, then, were policies to boost spending... But the normal response, cutting interest rates, wasn’t available, because rates were
already near zero. What we needed, instead, was fiscal stimulus: increased government outlays and tax cuts for lower- and middle-income families, who would be likely to spend them. And we did indeed get
substantial stimulus. But it wasn’t big enough, and even more important, it faded out much too fast. By 2013, with unemployment still above 7%, government at all levels was providing
barely more economic support than it had in 2007, when the housing boom was still running strong.
Why did the response to a depressed economy fall short?...
the most important reason the great slump went on so long was scorched-earth Republican opposition to anything and everything that might have helped offset the fallout from the housing bust.
When I say “scorched earth,” I’m not being hyperbolic. Let’s not forget that in the summer of 2011 Republicans in Congress threatened to provoke a new financial crisis by
refusing to raise the debt limit. Their goal was to blackmail President Barack Obama into cutting spending at a time when unemployment was still 9% and U.S. real borrowing costs were
close to zero.
