Seven years after the housing crisis, which led to the financial crisis, which led to the recession, it may be time to review what happened to the people, the government, and the financial industry (banks, mortgage lenders, and investment firms).
I have found that three questions are most useful in trying to understand major events like the financial crisis. Who pays? Who benefits? And, is it fair? Using these questions on the 2008 crisis, it becomes obvious that the 99% has been short-changed.
The People and Government Paid:
Lost interest income:
It has been estimated that between August 2007 and September 2013, holders of savings accounts lost nearly $1.2 trillion in interest income due to the Federal Reserve's policy of near-zero interest rates. (1)
Lost wage income:
In 2013, the Government Accountability Office (GAO) estimated an increase in unemployment from 5% in 2008, to a peak of about 10% in 2010, declining to about 8% in 2012. (2) The average increase in unemployment due to the crisis was about 3% per year over the five years measured.
Total nonfarm employment in January 2008 was about 138 million. (3) The 3% increase in unemployment amounts to an extra 4 million people unemployed each year during the recession. Taking a conservative estimate of average wages during this period of $25,000, this amounts to about $100 billion/year in lost wages, or about $500 billion between 2008 and 2012.
For comparison, a 2009 independent estimate by the Center for Economic and Policy Research (4) projected lost wages over the same period at over $1 trillion. So, it is safe to say that the crisis cost workers between $1/2 and 1 trillion in lost income from 2008-2012.
Lost home equity:
The same 2013 GAO report (5) also noted that "...households collectively lost about $9.1 trillion (in constant 2011 dollars) in national home equity between 2005 and 2011, in part because of the decline in home prices." While home values have substantially recovered by now, the losses spanned nearly a decade, affecting family wealth across the country. Many homes remain "under water," worth less than their mortgages.
Direct foreclosure losses:
"Too big to fail," did not apply to homeowners. Both Clinton and Obama called for a one year moratorium on foreclosures during the election campaign. After the election, silence in the White House. Silence in Congress. No moratorium on foreclosures. No significant helping hand for homeowners.
Estimates of the number of homes foreclosed range from 5-15 million, since 2008. It is difficult to find reports on how much individual homeowners lost in the crisis. Losses include their equity in a home, plus mortgage and legal fees. If I assume 10 million foreclosures, and that the average loss per home was around $20,000 (a very conservative estimate), then over $200 billion was lost nation-wide. Other estimates range up to $1 trillion, but sources for these are few, and hard to locate and evaluate.
The Financial Industry Received a Bailout:
The total net U.S. bailout outlays were $3.3 trillion, plus a total of $16.9 trillion in guarantees.
Details of the Net Bailout Outlays: (6)
The infamous Troubled Asset Relief Program (TARP) spent nearly $900 billion in bailouts of the "too big to fail." Even though it eventually recovered about $700 billion, the public perception remains that this program saved the financial industry, while giving nothing to the people who suffered from the crisis.
The Treasury spent about $500 billion, most of it in purchases of industry financial instruments.
The Federal Reserve spent a net of about $2.6 trillion, again most of it in purchases of financial instruments.
The Treasury guaranteed about $4 trillion, most of it to back money market mutual funds.
The Federal Reserve guaranteed about $2 trillion, most of it for commercial instruments.
The Federal Deposit Insurance Corporation guaranteed about 2.5 trillion, in temporary liquidity guarantees.
Other government programs guaranteed about $7.6 trillion, most of it for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank.
This bears repeating: the total net U.S. government bailout outlays were $3.3 trillion, plus a total of $16.9 trillion in guarantees. These funds bailed out and backed the banks, mortgage lenders and investment firms which marketed and profited from the shaky securities which created the housing crisis.
So, we know who benefitted during the crisis: the financial industry. "Too big to fail," cost us a great deal. A simple question: does the world really need Goldman Sachs? Instead, why not a little capitalist "creative destruction," with new companies replacing the failed financial industry?
The government's policy of individual accountability vs corporate impunity just might explain the fury of Occupy Wall Street and the Tea Party, as well as many millions of people around the country.
Let's summarize the core of this history in the following table of direct costs:
THE DIRECT COSTS OF THE 2008 HOUSING/FINANCIAL CRISIS
The people........................... Lost at least $ 1.9 trillion
The government.................... Paid at least $ 3.3 trillion
The financial industry.......... Received at least $ 3.3 trillion
The third question, "Is this fair?"
The obvious answer is "NO!" But now we have to ask another question: what can be done to rebalance the costs and benefits among the key parties?
The financial industry should pay back at least some of the huge costs it imposed on the country. It is time for reparations. As a starting point for the discussion, here is a modest proposal: retrieve $4 trillion from the financial industry, returning $2 trillion to the people and $2 trillion to the government.
I would structure this payback as a 40 year loan, amortized as a 4% mortgage repayment. On this basis, the annual repayment to the treasury would be about $200 billion. The industry would have to figure out how to generate this payback, but a surcharge on financial transactions would be an easy starting point.
The government can handle collecting $2 trillion in reparations over 40 years, but what would work for the people? I would have the Treasury just write the checks, and use the industry repayments to recover the money. Payments to the people would be made within the next year.
About $1 trillion would go to those who suffered foreclosures since 2007, at least partly restoring their lost equity. The second $1 trillion would go as checks to nearly every adult in the country, an average of about $5,000 per person.
A Presidential Commission could work out the details, in a short time. One guideline: protect small and medium banks and mortgage companies from large assessments. Another guideline: use the industry's records to determine the foreclosure reparations, with little individual paperwork. A third guideline: tilt the individual checks toward those who lost jobs in the recession. A fourth guideline: no reparations for those making over $250,000/year.
The financial industry has to be held accountable for the impact of the crisis. Reparations for the 99% could go a long way toward restoring a sense of fairness to the people. Why not get going? Now.
(1) Mario Belotti (Professor) and Maria Farley (Research Assistant), University of Santa Clara, http://www.mercurynews.com/opinion/ci_25513299/fed-policies-income-inequality-has-been-one-results?source=rss
(2) GAO, "Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act, Page 18, Figure 3 http://gao.gov/assets/660/651322.pdf
(3) Bureau of Labor Statistics data
(4) Center for Economic and Policy Research, http://www.cepr.net/documents/publications/wage-deficit-2009-12.pdf
(5) GAO, http://gao.gov/assets/660/651322.pdf, Page 21
(6) Christopher Chantrill, http://usfederalbailout.com/program_details