This article appeared in the Patriot News, Mar.8, 2011.
The rise of the stock market in recent months might have dulled investors’ memories about the devastating period that began in September 2008 and lasted till March 2009.
On Sept. 15, 2008, Lehman Brothers declared bankruptcy. The Dow lost 500 points that day. In the weeks that followed, the market continued to take punishing losses. Daily losses of 200 or 300 points became routine as wave upon wave of panic coursed through the financial markets.
Investors, desperate to stem losses in their portfolios, sought to sell equities and embrace the safety of government bonds. Even money market mutual funds came to be regarded as suspect.
The rout continued for months. The Dow began September 2008 at 11,500. By Oct. 10, just more than a month later, it had dropped to 8,400 — a loss of more than 3,000 points. The next few months saw periods of gains and losses, mostly the latter, till by March 9, 2009, it had reached its nadir of 6,500. Within the span of six months, the Dow had lost a mind-numbing 5,000 points, a decline of more than 40 percent.
Their portfolios ravaged, individuals were forced to postpone their retirement, retirees sought out part-time jobs to maintain their standard of living, and everyone had to contend with a more uncertain financial future.
The blow to household wealth could not have come at a worse time. The housing market had crashed months ago and showed no signs of recovering in the near future. Saddled with falling home prices, and — in some cases — mortgages that exceeded the value of their homes, households were left reeling. The primary asset for most Americans, their home, had turned out to be built on shaky foundations.
While their wealth was being eroded by the twin declines in the stock market and the housing market, individuals had to contend with yet another menace — the specter of unemployment.
The economic recession had begun in December 2007, the last month of the Bush presidency. The unemployment rate stood at 5 percent, but as the turmoil in the financial and housing markets began to take their toll, the labor market conditions became worse, till by December 2008, the unemployment rate had reached 7.3 percent. Economic activity decelerated. In the fourth quarter of 2008, the economy shrank by 6.8 percent, a sobering figure.
All in all, things looked pretty bleak in the second half of 2008.
But fortunately, governments had learned a thing or two about dealing with recessions, even deep recessions. The recipe wasn’t too complicated: Because the private sector was unwilling (or unable) to spend, the government needed to pick up the slack.
Thus, to spur aggregate spending in the economy, the government should increase spending, cut taxes and reduce interest rates.
The Obama administration implemented an $800 billion stimulus package,
comprising increased spending (on infrastructure and the like) and reduced income taxes. At the same time, Ben Bernanke, chairman of the Federal Reserve, cut interest rates, lowering the cost of borrowing to historic lows. Other measures to stabilize financial markets were undertaken, including TARP (much-derided for its bailouts) — and these proved successful at stemming the rot.
The combination of spending increases and tax cuts has widened the budget deficit to more than 10 percent of gross domestic product. Because these annual deficits are financed through borrowing (bonds issued by the federal government), the national debt has risen and will continue to do so for the foreseeable future.
The increase in debt led many to believe that inflation would begin to rise uncontrollably. These fears have proved unfounded as inflation has remained quiescent for the last two years. The January data show that the consumer price index has risen 1.6 percent in the last 12 months. Excluding the changes in prices of food and energy, the index has risen a scant 1.0 percent.
We are now in the midst of a recovery — gross domestic product has risen for 18 consecutive months. And though unemployment remains stubbornly high at 9 percent, there are signs that employers have started to hire again.
We have come a long way since those dark days of September 2008. Policy makers in Washington deserve a great deal of credit for effectively managing the country through one of its greatest crises.