15.5: The Great Recession
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The Great Recession began, as most American economic catastrophes began, with the bursting of a speculative bubble. Throughout the 1990s and into the new millennium, home prices continued to climb, and financial services firms looked to cash in on what seemed to be a safe but lucrative investment. After the dot-com bubble burst, investors searched for a secure investment rooted in clear value, rather than in trendy technological speculation. What could be more secure than real estate? But mortgage companies began writing increasingly risky loans and then bundling them together and selling them over and over again, sometimes so quickly that it became difficult to determine exactly who owned what.
Decades of financial deregulation had rolled back Depression-era restraints and again allowed risky business practices to dominate the world of American finance. It was a bipartisan agenda. In the 1990s, for instance, Bill Clinton signed the Gramm-Leach-Bliley Act, repealing provisions of the 1933 Glass-Steagall Act separating commercial and investment banks, and the Commodity Futures Modernization Act, which exempted credit-default swaps—perhaps the key financial mechanism behind the crash—from regulation.
Mortgages had been so heavily leveraged that when American homeowners began to default on their loans, the whole system collapsed. Major financial services firms such as Bear Stearns and Lehman Brothers disappeared almost overnight. In order to prevent the crisis from spreading, the federal government poured billions of dollars into the industry, propping up hobbled banks. Massive giveaways to bankers created shock waves of resentment throughout the rest of the country. On the right, conservative members of the Tea Party decried the cronyism of an Obama administration filled with former Wall Street executives. The same energies also motivated the Occupy Wall Street movement, as mostly young left-leaning New Yorkers protested an American economy that seemed overwhelmingly tilted toward “the one percent.” 22
The Great Recession only magnified already rising income and wealth inequalities. According to the chief investment officer at JPMorgan Chase, the largest bank in the United States, “profit margins have reached levels not seen in decades,” and “reductions in wages and benefits explain the majority of the net improvement.” 23 A study from the Congressional Budget Office (CBO) found that since the late 1970s, after-tax benefits of the wealthiest 1 percent grew by over 300 percent. The “average” American’s after-tax benefits had grown 35 percent. Economic trends have disproportionately and objectively benefited the wealthiest Americans. Still, despite political rhetoric, American frustration failed to generate anything like the social unrest of the early twentieth century. A weakened labor movement and a strong conservative bloc continue to stymie serious attempts at reversing or even slowing economic inequalities. Occupy Wall Street managed to generate a fair number of headlines and shift public discussion away from budget cuts and toward inequality, but its membership amounted to only a fraction of the far more influential and money-driven Tea Party. Its presence on the public stage was fleeting.
The Great Recession, however, was not. While American banks quickly recovered and recaptured their steady profits, and the American stock market climbed again to new heights, American workers continued to lag. Job growth was slow and unemployment rates would remain stubbornly high for years. Wages froze, meanwhile, and well-paying full-time jobs that were lost were too often replaced by low-paying, part-time work. A generation of workers coming of age within the crisis, moreover, had been savaged by the economic collapse. Unemployment among young Americans hovered for years at rates nearly double the national average.