Five Years in Limbo

The US financial system may be more stable than it was five years ago, but that is a low bar – it was teetering on the edge of a precipice. Those in government and the financial sector who congratulate themselves on banks’ return to profitability and mild regulatory improvements should focus on what still needs to be done.

NEW YORK – 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.

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