President Obama announced the five-year anniversary of the financial crisis at his address to the nation last month, reminding Americans that we have yet to fully recover from the economic collapse of the 2008.
The 2008 financial crisis, known worldwide as the Global Financial Crisis, has had immediate and long-term effects on our nation’s economy that we are still recovering from today and most likely will be for many years to come.
According to an article from CNN, the economic crisis resulted in the failure of hundreds of large and small businesses and contributed to a vast decline in consumer wealth estimated in trillions of U.S. dollars.
The downturn in American economic activity also led to the 2008-2012 recession; argued by many economists to be the worst recession our country has seen since the Great Depression of the 1930s.
It has been five years since the crisis began and thousands of U.S. citizens and their families, small and large corporations, investment banks, as well as our national government are still struggling to recuperate.
Despite government attempts to remedy the economy after the financial collapse, there has been minimal economic recovery, an article from CNN explains. For example , the American Recovery and Reinvestment Act of 2009 attempted to save and create jobs as well as provide temporary relief for those impacted by the recession, but has not had worked as anticipated according to the article.
Michael Hamilton, senior political science major said, “The recovery process is going somewhat slow, however recovery is occurring for sure.”
So, how far have we come since the economic crisis of 2008? Is the economy improving, or are we in the same place we were five years ago? Through analyzing the downfall of U.S. stock market, a drastic spike in unemployment, and a struggling housing sector, the University has sought answers.
Wall Street
Dr. Steven Pressman, professor of economic finance, explained that the financial crisis arguably started when Lehman Brothers Holdings Inc., the fourth largest investment bank in the U.S, filed bankruptcy in September 2008.
After losing many of their clients and experiencing drastic losses in their stock, Lehman Brothers filed for the largest bankruptcy in U.S. history and is thought to have played a major role in the unfolding of the financial crisis across the globe, Pressman explained.
He described how many other financial giants at that time, such as Bear Stearns, Merrill Lynch, AIG, FannieMae, FreddieMac, and Citigroup who were prosperous prior to the collapse, have either disappeared, or have been rescued by large government bailouts.
Pressman explained, “The largest problem with Wall Street at this time was that banks, like Lehman, were giving loans to people who were unable to afford them.”
Those mortgage loans were then sold and packaged by Wall Street to several financial institutions throughout the world.
He described that in the past, banks were held accountable for the loans they issued to Americans. After the Great Depression, however, banks incentives changed dramatically and Wall Street bought thousands of individual loans, packaged them, and sold them to investors throughout the world with little regard to whether people could pay those loans back.
When homeowners couldn’t afford to pay back their loans, Wall Street suffered the consequences, Pressman explained. Although the federal government has tried in recent years to fix the struggling economy through various packages such as the stimulus package, it hasn’t been enough to fix the problem of bad loans, Pressman said.
In an attempt to remedy the problem of “easy credit,” banks are now being more conservative when determining who they allow to take out loans by looking more in-depth into an individual’s credit to ensure they will be able to pay back their mortgages.
Despite some progress, the banks are still left with the thousands of mortgages people haven’t been able to pay back, Pressman explained.
Pressman said that in order to help fix the problem, the government should bail out homeowners as it did the large investment banks.
“If the government really made a concerted effort to bail out the homeowners who were given bad mortgages, it could help the situation drastically,” Pressman said.
Hamilton explained that so long as the government keeps the value of its bonds and operations sufficient that the economy will recover, but policies such as the sequester may negatively affect the recovery process.
Unemployment
Most Americans, who have known economic hardship over the past several years, however, don’t think about the collapse of large banks and financial empires, President Obama explained in his address to the nation.
Instead, the President described, they think of the time they lost their job, the day the bank took away their home, the time they got sick but didn’t have health insurance, or the moment that they had to sit down their son or daughter and tell them they couldn’t afford to send their child back to college next semester.
President Obama explained that during the financial crisis, the economy was shrinking by an annual rate of more than 8 percent.
“Our businesses were shedding 800,000 jobs each month. It was a perfect storm that would rob millions of Americans of jobs and homes and savings that they had worked a lifetime to build,” Obama said.
According to the Bureau of Labor Statistics, the current unemployment rate sits at an estimated 7.2 percent and was at its highest in 2009 with an estimated 10 percent of the American population unemployed.
The report also indicated that the U.S. economy lost nearly 8.8 million jobs between January 2008 and February 2010, and has since gained back only about 6.2 million jobs.
Dr. Robert Scott, associate professor of economics, explained that although the numbers seem to indicate improvement, the biggest problem with the unemployment rate is the way that the government measures it.
He explained how the government fails to recognize those individuals who are barely scraping by with minimum wage jobs, or those who are under-employed meaning that are overqualified for the jobs that they are currently working, as being unemployed.
Scott said, “To be considered unemployed by today’s standards, you must not be working but also have to be actively looking for a job. So if you stop working and you are not looking for a job, you won’t be considered unemployed. That’s the problem with the current system.”
He believes that the current unemployment situation will improve over time, but that it’s difficult to say how long it will take to fully recover from the economic crisis of 2008. Scott explained how it’s blue-collar workers and those without college degrees, comprising the largest part of the population, who are often the most vulnerable to job loss.
He expressed, “I don’t see unemployment getting better anytime soon.” He believes that in order to make the situation better in a shorter period of time, the U.S. government should institute a public works program for those who are out of work.
Through examining the country’s problems, it’s evident that there is a massive public need to repair infrastructure such as roads, buildings, and railroads, Scott said.
“These are all things that need to get done, and why not fix two problems at the same time with people who are experienced and would be happy to work? Scott continued.”
“I don’t see [unemployment] getting any worse from here but it’s bad enough. Those are the reasons we should be trying to strengthen the labor market in any way that we can, not just in indirect ways but in direct ways,” he said.
Scott explained that despite the numbers indicating a slight improvement in unemployment, that it has largely stayed the same since the economic collapse began.
“I think it will get better. It won’t happen tomorrow or next year, but it will take a while for people to build their confidence back up […] It’s when there’s a significant lack of jobs, that it creates serious tension in the economy,” Scott said.
The Housing Bubble
Another factor that created serious tension in our nation’s economy immediately following the economic collapse is the housing bubble. According to an article from CNN, the housing market was undoubtedly one of the contributing factors of the financial collapse of the United States’s economy.
While the housing market suffered along with the economy, the real estate market found an increase in foreclosures and prolonged unemployment. The bursting of the housing bubble, which peaked in 2006, caused the values of mortgage-backed securities tied to U.S. real estate to plummet, damaging financial institutions globally.
Dr. Peter Reinhart, Director of the Kislak Real Estate Institute, explained that the financial crisis was triggered by various government policies that encouraged home ownership, providing easier access to loans for borrowers, and an overvaluation of bundled mortgages based on the theory that housing prices would continue to escalate.
Suddenly, those who were not able to afford mortgages before were able to get mortgages from zero to very little down payments, making buying a home more affordable for lower-income families, he explained.
Reinhart continued, “Unlike traditional lending methods, one particular bank no longer owns the mortgage. It’s packaged with thousands mortgage loans and sold to investors all around the world.”
What ultimately caused the bubble, he explained, was that “We had all this money to loan with the federal government policy encouraging additional loans. What you ended up with were some people who probably should have never had a loan because they weren’t financially qualified. That available money ended up driving up home prices because there was increased demand.”
He explained that when the bubble burst in early 2006-2007, people had mortgages with very little of their own equity involved. Many homes went into foreclosure or simply walked away from their homes, unable to pay back the mortgages loaned to them.
The long-term effect from this was that there was a dramatic drop in home values, as much as 50 percent or more in certain parts of the country, Reinhart explained.
However, he described, housing and financial markets are cyclical. “We hit the bottom and now we’re going up in terms of the housing market,” he said.
Reinhart described what he refers to as “the hangover effects of easy mortgage money,” in that now it is much more difficult to get a loan or a mortgage than it was just several years ago. He said that a few years ago, there were “NODOC” loans, or loans that didn’t require an individual to document that they had a job or savings to pay the loan back.
The banks, however, are tightening restrictions and requiring more information prior to loan approval, which is ultimately a good thing, Reinhart explained.
“The market is recovering in all states, but New Jersey is recovering a little bit slower in some respects. Since NJ is a judicial state in terms of mortgage foreclosures, the bank has to go through a lengthy court process before it can own said homes,” he said.
He also explained how Superstorm Sandy has had a significant impact on the housing market for homes along the shoreline. “That market has been artificially impacted by the storm so the state is in a bit of chaos right now,” he said.
Reinhart believes that the real estate market has been coming back for almost two years. “It’s a cyclical industry – it always has been and always will be. We’re at an uptick now,” he said.
He described how people forget that the real estate industry is a cyclical one, and many assumed that the market would always go up. It wasn’t until the economic crash that people remembered that the market’s cyclical nature.
