Technically, the financial crisis began in late 2008, with the collapse of Bear Stearns and Lehman Brothers. But 2009 was the year we really felt it. It was in 2009 that we lost more than 5 million jobs — the majority of the total job losses caused by the recession.
By 2010, we seemed to turn the corner. The economy added more than a million jobs. Growth returned. The financial markets stabilized. Many forecasters looked to 2011 with real optimism.
Instead, 2011 has been the year of the aftershocks. It's become clear that no, this is not over. Worse, it might not be over for a long time.
The first, and biggest, aftershock has been the crisis in Europe. Before the financial crisis, the eurozone looked like a success story. Germany was thriving. Italy and Spain were actually reducing their debt. With its low corporate taxes and quick growth, Ireland was considered a major free-market success story.
The financial crisis changed three things for Europe. First, the market grew more risk-averse, and so began wondering whether Greece, which was deeply in debt, could really keep up its payments. Second, rising unemployment meant that revenue dried up even as social spending began to rise, leading to large deficits in nations already overburdened with debt. And finally, the global economy slowed, and so countries that were easily balancing their books when growth was swift found themselves falling deeper into debt as their economies weakened.
This, in turn, forced the eurozone to face some uncomfortable truths. First, that the markets expected Germany and the other strong economies to bail out any laggards. Second, that weak countries in the eurozone couldn't do what weak countries normally do and devalue their currency to boost exports. They were, instead, stuck with a currency that made their exports uncompetitive and their recovery more difficult. And, finally, that the eurozone had no actual plan for resolving these tensions, and the European Central Bank, to the surprise of many, would not automatically intervene, a la the Federal Reserve, to end a looming financial crisis.
Going into 2012, these tensions remain unresolved, and a chaotic endgame in Europe is the most significant headwind facing the U.S. economy.
But like in the eurozone, the financial crisis has uncovered some deep institutional dysfunctions that threaten growth over the next few years in the United States.
Periods of extreme economic stress breed extreme political reactions. The tea party is one such example. And in 2010, the tea party led Republicans to win back the House of Representatives.
To hold that alliance, however, the Republican Party has had to become significantly more ideological and intransigent. In 2011, House Republicans almost forced a government shutdown, a default on the debt and an expiration in the payroll tax cut and unemployment insurance benefits. In each case, cooler heads eventually prevailed.
Perhaps worse, when Congress isn't threatening to create unnecessary catastrophes, it's not doing anything at all.
The good news is that the American economy has been relatively resilient to these headwinds. It has added more than 1.5 million jobs, and hasn't had a single negative month. Exports are strong. It's not enough to say we're really recovering, but it's enough to say that there's clearly some potential to recover if Europe gets its act together and Congress does its job.