Easy Chair — From the September 2013 issue

If Memory Swerves

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September 15 will mark five years since the beginning of the economic slump that defines the world we live in. Disaster was in the air already by that day in 2008: real-estate values had been falling for some time, Bear Stearns and several big commercial banks had failed, and the government had taken over the mortgage insurers Fannie Mae and Freddie Mac the previous week. But that Monday morning in September was when the larger economy went over a cliff — after Lehman Brothers, the nation’s fourth largest investment bank, finally succumbed to the effects of the noxious securities on which it had gorged itself for years.

Later that day, in a climate of almost complete panic, Merrill Lynch — the nation’s third largest investment bank, which had fed at the same trough — managed to find shelter in the arms of Bank of America. By the next day, the Federal Reserve and the Treasury Department announced that they were saving AIG, the mammoth insurance company that had transformed itself into a stealth hedge fund. As for actual hedge funds, more than 700 of them collapsed in the subsequent four months. And Goldman Sachs and Morgan Stanley, the last two investment-banking leviathans, desperately registered themselves as “bank holding companies” and threw themselves upon the mercy of the all-forgiving Fed.

It was the unavoidable explosion after decades of deregulation and willful blindness. A kind of waste product had been deliberately moved through the bowels of a hundred shady mortgage outfits. It was then gilded by delusional ratings agencies and sold to the world by the most respected names in finance. Bribery and deceit and crazy incentives had been the laxatives that pushed this product down the pipe; money and bonhomie and reassuring economic theory had been the sedatives that put the regulators to sleep.

The industry would supervise itself, we were told — and we believed it. Instead our economic order turned out to be wobbly, even rotten. The great banks looked insolvent. The great capitalists looked like criminals.

Then came a second outrage to rival the first. Treasury Secretary Hank Paulson, who had been effectively promoted to king by a frantic George W. Bush, demanded and received $700 billion from Congress to resuscitate the banks run by his former colleagues on Wall Street. There was a class of businesses, we learned, that could not be allowed to fail, no matter what kinds of suicide missions they undertook; and there was a class of people who could not be held responsible for their deeds, no matter how they beggared the world or deceived their marks. That this class’s chosen public persona was one of churlish, sniggering contempt for the non-crooks who were now required to rescue them only compounded the shock.

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