In the fall of 2008, I was a staff member at the Congressional Joint Economic Committee, working for Rep. Carolyn Maloney (D-NY). We all watched in horror as, day by day, financial markets imploded, taking the U.S. economy down with them. Millions of workers lost their jobs, it took years to achieve a full economic recovery, and we still don’t know when or whether the deep, bitter political fissure it created will heal. The congresswoman would often turn to us and say with a sigh, “May you live in interesting times.”
And yet, what’s coming may be worse. The United States is facing — or indeed already is in — an economic recession induced by a global pandemic, which has led policymakers to shut down many parts of the U.S. economy. But decreasing the transmission of the virus and “flattening the curve” is, at the same time, causing an economic slowdown. And that may lead to a coronavirus recession that will put the Great Recession to shame, in no small part because the administration has failed to act swiftly enough to reduce the transmission of COVID-19 and ensure widespread free testing.
Reflecting on my experience over a decade ago, the two crises are different in some important ways.
The crisis we face today is caused in part, and certainly is exacerbated, by fragilities in our economy and society. For one thing, the economic inequality that existed in 2008 has not improved. This has made the United States especially susceptible to the spread of an infectious disease. How? Millions of workers — disproportionately in services and at the low end of the income distribution — lacked access to paid sick time. We are burdened with a deeply flawed healthcare system that is far more costly than elsewhere in the world. People in the United States pay twice as much per person, on average, yet have life expectancies shorter than many our economic competitors.
Our too-costly healthcare system leaves many millions uninsured or underinsured, unable to access quality care in the best of times, and lacks systems to ensure that people remain healthy in this serious yet predictable pandemic. All of this is on top of our weak and underfunded social insurance systems.
But we need to remember that these problems, and the economy more generally, didn’t just happen to us. They are the result of choices that policymakers have made over time. Only government has the power to implement policies that reduce rather than increase inequality, ensure that every worker has a high-quality job, or establish an equitable and effective healthcare system. Individual choices are important right now, but decisions made by federal, state, and local policymakers that help us mitigate both the health and economic effects of the coronavirus will have an even greater impact.
In this way, the 2008 crisis and today are alike: The Great Recession was also directly traceable to decisions by policymakers. Yet that crisis was the result of another set of fragilities also connected to economic inequality, ones that had been created over the prior decades as policymakers deregulated our financial industry. Shortsighted policies enabled the creation of an industry based on making money out of thin air, manufacturing financial instruments from mortgages and other home loans to create additional “value” that turned out to be nonexistent when the housing market crashed beginning in 2006. A man-made crisis in every way, 2008 exposed the fragility and, frankly, moral corruption of our banking and financial systems.
The Great Recession unfolded over a year as the housing bubble collapsed, and policymakers and the public learned about the complex financial instruments Wall Street had unleashed on the public. Today, it doesn’t take an economist to understand what happens when millions of Americans can’t leave their homes. But back then, those financial shenanigans not only made it hard for the public to understand exactly what was happening; they also posed complex, technical challenges for policymakers.
When I worked on Capitol Hill, one of my daily tasks was to provide a run-down of the measures taken by the Federal Reserve, some of which were considered extreme. First, the Fed started lowering interest rates, with most of the reduction taking place in the first and last quarters of 2008. Then, beginning at the end of 2007 and continuing through 2008 and beyond, the Fed introduced a series of programs to provide massive targeted assistance to affected financial institutions, from money market mutual funds to securities dealers. And finally, in November 2008, the Fed began its extraordinary Large-Scale Asset Purchases program, commonly known as “quantitative easing.” This was the mass purchase of government bonds and other assets to inject new money into the economy, a program that has remained in place and has already been employed to combat the current financial crisis.
But as much as the Fed was doing to support the financial industry, the administration and Congress also needed to enact legislation to provide funds to shore up the banking industry. I clearly remember the day President George W. Bush’s Treasury Secretary Hank Paulson sent over a three-page document outlining a rescue of the nation’s largest banks, which were on the verge of collapse. Speaker of the House Nancy Pelosi (D-CA) and other Democratic leaders balked at what amounted to a bailout of those who had created the crisis, and they believed such legislation could not and should not pass without industry reforms to prevent future crises, limits on executive compensation for companies benefiting from the package, and increases in unemployment benefits to support the incomes of families out of work.
Ultimately, however, such reforms would have to wait for a new Congress and a new president. At the time, the public was told the economy would implode if we did not rescue the banks, and that such a rescue needed to happen immediately.
It was an extraordinary time. Even former Federal Reserve Board Chairman Alan Greenspan admitted he had been wrong. There was the October 2008 hearing of the House Oversight and Government Reform Committee, where my boss, Rep. Maloney, asked Greenspan about his opposition to the regulation of derivatives, the kind of financial instruments that had caused the financial collapse. He acknowledged that there “was a hole in the model.” What an understatement.
It was unpleasant medicine, but Congress did pass the Troubled Asset Relief Program, which spent more than $400 billion on the nearly worthless mortgage-backed securities held by banks and other institutions, and bank stock as well. Only at the insistence of Congress did the legislation demand that companies pay back the assistance when they regained their health.
It made me angry, and I wasn’t alone. The perpetrators of the worst financial crisis since the Great Depression were not only bailed out by the U.S. government but also paid no penalty at all — while millions of families and small businesses struggled to survive. Families all across the United States had to wait until 2009, when a new president and Congress passed a large recovery package. Among the main components of the American Recovery and Reinvestment Act were extended Unemployment Insurance benefits and increased spending on education and health, substantial investments in infrastructure, research, and other areas, support for small businesses, and tax rebates for individuals.
The Recovery Act also placed the kinds of limits on executive compensation that were omitted from the Troubled Asset Relief Program. Likewise, the new president and Congress enacted financial industry reforms — the Dodd-Frank Act — to bring greater accountability and safety to the banking and financial industries.
Today’s crisis is much simpler. It’s not the result of confusing derivatives or exotic currency trading, but of a pandemic virus. This time, we don’t need to bail out Wall Street. We need to focus on ensuring that people can remain healthy and that if they are sick or their employer has been forced to send them home, they are able to sit out the economy for a while, as every professional athlete in every sport is doing.
Economic crises put enormous stress on families, businesses, and communities. Our country has only begun to feel the pain. We made it through the Great Recession, but it left permanent financial and political scars. While this crisis is very different, we can still apply the lessons of the Great Recession — act quickly, aggressively, and compassionately. As it was then, doing too little poses a far greater risk than doing too much.
Unfortunately, we continue to live in interesting times.
Heather Boushey is President and CEO of the Washington Center for Equitable Growth and the author of the book Unbound: How Inequality Constricts Our Economy and What We Can Do About It.