The Economy: Why They Failed

Chip Somodevilla/Bloomberg/Getty Images
President Barack Obama, Senator Christopher Dodd (center left), and Representative Barney Frank (right) at the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Washington, D.C., July 21, 2010

On Wall Street, the Great Recession didn’t last very long. Having sustained losses of $42.6 billion in 2008, the securities industry generated $55 billion in profits in 2009, smashing the previous record, and it paid out $20.3 billion in bonuses. In the spring of 2010, the Wall Street gusher continued to spew money. Between January and March, Citigroup’s investment banking division made more than $2.5 billion in profits. Goldman Sachs’s traders enjoyed their best quarter ever, generating an astonishing $7.4 billion in net revenues.

Barely a year and a half after the collapse of Lehman Brothers, Wall Street was once again doing well for itself—obscenely well, it seemed to many people. “For most Americans, these huge bonuses are a bitter pill and hard to comprehend,” noted Thomas DiNapoli, the comptroller of New York State, whose office tracks Wall Street profits. “Taxpayers bailed them out, and now they’re back making money while many New York families are still struggling to make ends meet.” In other parts of the country, Americans weren’t merely resentful; they were fiercely angry at the Wall Street bonus recipients and the politicians who had rescued them. (“Hank, the American people don’t like bailouts,” Sarah Palin, John McCain’s running mate, had warned Treasury Secretary Henry Paulson in October 2008.)

And yet, judged purely in economic terms, the Bush-Obama rescue program had proved fairly successful. Since July 2009, the Gross Domestic Product had been expanding steadily, confirming the predictions of recovery that Timothy Geithner and Ben Bernanke had made. The rate of growth was modest rather than spectacular—about 3 percent on an annualized basis—but it belied the doomsters’ prognostications. Measured by the economy’s overall output of goods and services, the recession had ended more quickly than expected. In May 2010, the Organization for Economic Co-operation and Development, an economic research body based in Paris, said that the world economy would grow by 4.6 percent in 2010 and 4.5 percent in 2011. Despite widespread fears of a “double dip” recession, the global recovery appeared to be continuing.

Aside from allowing Lehman to collapse, policymakers had avoided the mistakes of the 1930s. By injecting taxpayers’ money into struggling financial institutions and guaranteeing their debts, they had arrested the vicious cycle of falling prices of stocks and other assets, panic selling, and further falls in prices. By reducing short-term interest rates virtually to zero, they had halted a similar downward spiral in the real estate market. (With the cost of mortgage loans at historic lows, bargain seekers entered the market, putting something of a “floor” under prices.) And by introducing tax cuts and additional public spending programs, governments had counteracted the economy-wide vicious cycle in which tumbling…

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