Five years ago this month, the giant Wall Street investment bank Lehman Bros. went bankrupt, touching off a series of events that plunged the United States into its worst financial crisis in 80 years. It's now clear that another Depression was averted due to one factor: the federal government's bold actions to backstop the economy. The much-maligned bank bailout, an effort that spanned Republican and Democratic administrations, saved the financial sector from complete collapse. President Barack Obama's stimulus package and auto industry bailout put the brakes on devastating job losses. Five years later many, Americans are still hurting, and last week the Federal Reserve decided to continue its stimulus program until the economy gets stronger. There is a long way to go, but federal intervention into the free market prevented a deeper crisis.
The overleveraged financial sector panicked when Lehman Bros. went bankrupt. Credit markets froze, cutting off essential lending and resulting in a cascade of job losses, plummeting housing values and economic meltdown. In all, Americans lost 8.7 million jobs and have recovered only about 6.8 million. By September 2012, more than 12.5 million homeowners were deeply underwater, owing substantially more than their home was worth. That is abating as housing prices rise. The U.S. economy overall was walloped by $14 trillion in lost activity, according to economists at the Dallas Federal Reserve who considered their estimate conservative.
A consensus has emerged among economists that as painful as the last five years have been, they would have been far worse had leaders in Washington been free-market absolutists, shrugged their shoulders and let the chips fall. Instead, within weeks of Lehman Bros.' collapse, Republican President George W. Bush and a bipartisan Congress passed the $700 billion bank bailout program known as the Troubled Asset Relief Program, or TARP. The program rescued the Wall Street executives whose reckless risk-taking had brought about the crisis, stoking public anger. But it brought financial stability to the banking sector, staving off wider calamity.
Obama continued Bush's work and spread the TARP money to the auto industry. He kept General Motors and Chrysler afloat, saving countless jobs in auto manufacturing and its vast supply chain. And now, the government has largely recouped its TARP funds. Critics who said TARP would be money thrown down a rat hole turned out to be flat-out wrong.
The $787 billion stimulus package Obama signed in 2009 was another essential feature of the economic rescue. The American Recovery and Reinvestment Act saved or created an estimated 2.5 million jobs by boosting consumer demand, investing in public works projects and giving state and local governments the resources to hold on to government workers such as teachers and police officers. The Congressional Budget Office has found that the nation's gross domestic product has been higher every year since 2009 due to stimulus spending, especially in 2010 when it was needed most.
The opponents of the stimulus, which if anything should have been larger, have been proven wrong. Had their austerity prescription been followed it would have exacerbated the economic slowdown. Last month the economy added 169,000 jobs. Still not good, but a far cry from the 794,000 jobs lost in January 2009.
America's recovering economy is due to the federal government stepping in when few in the private sector were lending or hiring. The nation's deficit is shrinking as the economy gradually improves. There is more work to be done, and the Fed warned last week that budget fights between Congress and the White House could hurt the economy. But the lesson five years out is clear: Government intervention in a crisis worked.