A Decade Later, America's Response To The Financial Crisis

Sep 13, 2018
Originally published on September 13, 2018 9:31 pm
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AUDIE CORNISH, HOST:

Ten years ago this month, huge banks teetered on the edge of bankruptcy. Some failed, and markets worldwide plunged into chaos.

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UNIDENTIFIED REPORTER #1: Right now, breaking news here - stocks all around the world are tanking because of the crisis on Wall Street.

UNIDENTIFIED REPORTER #2: The Dow tumbled more than 500 points after two pillars of the Street tumbled over the weekend.

UNIDENTIFIED REPORTER #3: The bankruptcy of Lehman Brothers, the sale of Merrill Lynch to Bank of America and word of trouble with the world's largest insurance company.

CORNISH: The 2008 crisis left its mark on our financial system and our government. Behavioral economists believe it also left its mark on us. People who lived through the crisis and suffered from it changed their behavior. That in turn changed our economy. Cardiff Garcia from our Planet Money team has been looking into this. He's co-host of the daily economic podcast The Indicator. Welcome back.

CARDIFF GARCIA, BYLINE: Hey, Audie.

CORNISH: So what can we say about the ways in which living through an experience like the financial crisis changes actually how people think and act when it comes to their finances?

GARCIA: Yeah, very broadly, we know that living through, like, a big, consequential economic event like this tends to influence how willing we are to take risks. And when the event is of a harmful, for many people devastating kind of event like the financial crisis, it makes them more cautious and less likely to participate in the stock market, less likely to borrow money to buy things. And it also makes the people who run companies and even banks more cautious as well - so just more caution for everyone.

CORNISH: Can you give us some examples?

GARCIA: Yeah. I mean, there's a few examples. This is based on the work of an economist named Ulrike Malmendier. And she's found that, for example, CEOs who grew up during the Great Depression ended up running their companies with less debt throughout their lives, taking less risk. And she's also found that after declines in housing prices like what happened in the financial crisis, people are less willing to take out mortgages to buy homes.

And what's really interesting about this work is that this effect of making people more cautious can last a very long time, even after the economy has started recovering and you would think that it's safer to start taking risks again. And the effect is sometimes also stronger in young people, probably because the traumatic event in question accounts for just a bigger share of their lives.

CORNISH: Have we actually seen evidence of these effects in the economy, though?

GARCIA: I think we have. So for instance, stock market participation for the middle class has not yet gone back to where it was before the crisis. And that's despite quite a healthy recovery in the stock market. And until just the last couple of years, when the economy got a lot healthier, businesses had been really slow to increase how much money they're paying people and how much money they spend on things like equipment and research and new factories.

And banks themselves have also been very kind of tightfisted in lending, especially mortgage lending. So these effects can also partly be driven by other variables like the overall pace of economic growth. But I think it's also reasonable to assume that a lot of this behavior has also just been a lingering effect of the crisis itself.

CORNISH: So is that really a good or a bad thing? I mean, the economy seems to be doing really well, and the problem with the crisis was that people took on too much risk.

GARCIA: Yeah, that's absolutely the case. And it's true that the economy now is doing well, but especially in the first few years after the crisis ended, the economy was actually growing very, very slowly. So it's taken a while. And this actually is related to the fact that perhaps people are more cautious after the crisis because remember; you need people to take risks in order for the economy to grow.

On the other hand, if people are very careful about the kind of risks that they're taking, then the economy, yes, might grow a little bit more slowly, especially right after the crisis. But it also means that the economy is less vulnerable to the next downturn and that maybe the economy can keep growing for a little while longer before we dip back into a recession.

CORNISH: Cardiff, thanks so much for your reporting.

GARCIA: You got it.

CORNISH: Cardiff Garcia co-hosts NPR's daily economics podcast The Indicator, where you can hear more about the psychological impact of the financial crisis.

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