While it may have been a mistake to fix or try to fix the banking system in 2007-8 with federal government (AKA public) funds, that’s what we did and now we must live with the consequences. Housing markets also failed as millions of homes were purchased earlier at prices that were no longer anywhere near what they could sell for in 2008-9 or even later. Indeed, the whole market effectively tanked as most houses could not be sold at any price. So much was owed to banks or other mortgage holders that sales could not occur unless banks were willing to write off what was still owed once a price was agreed upon — and banks or holders of bundled derivative mortgages at that point were not willing to write off those kinds of losses. The losses would have been in the multi-trillion dollar range. The prospect that grim was frankly to complex and scary to face. Further, it’s fair to say, no one in the financial community could figure out how to do it without possibly creating a full scale panic. Housing markets were effectively not open for business. Few loans were granted and few houses were sold.
The Federal Reserve Bank effectively went about the business of getting the banks up and running again. However, the banks were not totally up for the process. Even as the TARP program got underway, many failed so-called “stress tests” that may have been watered down a bit at the beginning. There was talk of nationalizing the banks, but nothing even came to it as most of the banks with the additional help of overnight loans from the Federal Reserve slowly began making a profit again and helping to reestablish business as usual (or close to business as usual).
In the early days of the crisis equities to a serious dive, dropping to perhaps half their original value. This deep loss in equity value was further driven by stockholders who took trillions out of markets and by rapidly failing businesses that could not sustain themselves with out cash loans. Many small banks failed, but the FDIC was able make good on all deposits. Thus, while there was a lot of fear that focused on the long run future of the financial system, the Federal Reserve Bank and Treasury managed to hold things together, while and insufficient federal government financial stimulus promised to restore order in the financial system and get people back to work. Unemployment quickly grew and before long exceeded 10 percent. In some regions of the country unemployment was much greater while much less in others.
Equity losses assured a large drop in IRAs and other retirement funds and those close to retirement simply put everything on hold while stock prices have slowly recovered (and thus IRAs have recovered as well). Unemployment has again diminished to near pre-financial crisis numbers. So, where are we?
Debt is still everywhere and the banks are still hiding their real losses, but there are signs that they may be divesting many of the bad investments made prior to 2008, and that will result in some recovery with much of it still written off. The financial system is more stable and safer than it was in the immediate aftermath of the 2008 crisis, but it is hard to argue that the nation is not broke. We have nearly a $20 trillion national debt, which may be about to be paid off in the short term with hyper-inflated dollars. The Federal Reserve Bank has effectively allowed Treasury to print 5-6 trillion or more to fund it’s Quantitative Easing (QE) policy (buying government treasuries and thus effectively pushing down the interest the government has to pay to borrow money to finance the debt).
QE also drove up the cost of commodities and the apparent value of equities, which now appear artificially overvalued. As QE fades the overvalued equities market is likely to drop as well. Yet at the same time with trillions more in the system and large national debt looming many argue that hyperinflation is a threat. Indeed, we may be able to pay of many debts with this increased money supply, but our creditors are no idiots and when the real value of their payments are understood, we run the risk of future sales of goods, both food and oil for example, being elevated to the real value of the dollar, or of sales being cut off completely unless we pay in some currency other than dollars. Dollars may be just fine within the country, but not outside the country.