Sunday, September 15, 2013, marked the fifth anniversary of Lehman Brothers’ bankruptcy, the largest in U.S. history. It is widely believed that Lehman’s meltdown set off a domino effect that led to the global financial crisis and proved to be a major contributing cause of the housing market collapse. Its demise undoubtedly sent shock waves around the world.
President Obama appears determined to use the anniversary of Lehman’s collapse to show that progress has been made. The White House argues that a better capitalized and more stringently regulated financial sector has resulted in an economic turnaround that is able to withstand the potential for future spending cuts and tax increases. “We’ve put more people back to work, but we’ve also cleared away the rubble of crisis and laid the foundation for stronger and more durable economic growth,” Obama commented in a recent statement.
In support of the recovery, Obama points to a growing economy which is extending more credit, rising housing prices, increased employment rates, and a rebounding stock market. Obama implored that he would “keep making the case for the smart investments and fiscal responsibility that keep our economy growing, creates jobs and keeps the U.S. competitive.”
In fact, the Dow Jones industrial average has returned to pre-crisis levels and appears to be primed for setting new heights. In that regard, progress has certainly been made considering that Lehman’s bankruptcy presaged losses that included a 5,000 point drop in the Dow industrial average, $7 trillion in wealth, and perhaps most importantly, a staggering decline of faith in the financial system.
Unfinished Business Remains
Notwithstanding the fact that the federal government has nearly been paid back in full five years after the government stepped in and infused certain banks with $245 billion in taxpayer money to avert a financial meltdown, the public is not entirely convinced that enough progress has been made. According to a Pew Research Center poll, only one-third say the economic system is more secure now than in 2008 and 52 percent say they disapprove of Obama’s handling of the economy. Despite 35 straight months of hiring, the unemployment rate is still at 7.3 percent and the income gap between the ultra-wealthy and the rest of the population is the largest it has been since 1928.
Among the lingering concerns people still have, many relate to replacing Fannie Mae and Freddie Mac. In a recent interview, former Treasury Secretary Henry Paulson said that saving mortgage giants Fannie Mae and Freddie Mac “was the single most important thing we did to prevent disaster — real disaster.” But, he adds, “it didn’t occur to me that we’d be here with nothing done.” It is clear that replacing Fannie and Freddie remains unfinished business following the government bailout.
President Obama supports recent proposed legislation that would replace Fannie and Freddie over the next 5 years with a newly created government reinsurer called Federal Mortgage Insurance Corporation, modeled after the FDIC. While the federal government would still play a prominent role in backing U.S. residential mortgage lending, the legislation would require private investors to take the first losses on mortgages in the event of default.
Meanwhile, regulators of the banking industry also remain concerned that the country’s biggest lending institutions still remain undercapitalized, even though reserves have significantly increased since the collapse. Economics professor Anil Kashyap of the University of Chicago’s Booth School of Business told Bloomberg, “The [biggest] banks need much more capital and liquidity. They’re still way short of being safe.”
That fact, and the trepidation it should inspire, may be the most disturbing indicators of what the next several years of the post-Lehman landscape will look like.