Axios AM Deep Dive

For millions of Americans, the 2008 financial crisis came out of the blue. On the theory that it's always calmest before the storm, could another financial crisis of the same magnitude come at any moment? The answer, reassuringly, is no, Axios' Felix Salmon writes:

• Bottom line: The stock market is frothy, and it's possible that entire industries like fracking could suffer widespread defaults. But when stocks and bonds go down rather than up, that's a market cycle — not a financial crisis.

Remember the stock market crash of 2000? People lost money, but the broad economy only experienced a mild recession. And post-crisis safeguards have made a crisis much less likely than it was in 2008.

• The financial crisis was a wake-up call to central banks in every country, which realized that their main job is bank supervision and crisis prevention, not setting interest rates.
• Basel III, a global financial reform package in which the U.S. participated, forced all of the world's biggest banks to become much safer than they were before.
• Dodd-Frank included beefed-up capital requirements that make it much harder for U.S. banks to take outsized risks. It also created the Financial Stability Oversight Council, which is charged with identifying and mitigating systemic risks.
• We no longer have "systemically-important" investment banks, whereas there were five pre-crisis: Lehman Brothers (RIP); Bear Stearns, bought by JPMorgan; Merrill Lynch, bought by Bank of America; and Goldman Sachs and Morgan Stanley, which became bank holding companies.

No regulatory regime is perfect. And crises still happen, as a glance at Turkey or Venezuela will attest. But very real progress has been made in terms of U.S. crisis prevention.

• Plus, American households are much less leveraged than they were pre-crisis, and the global liquidity glut is flowing into equity rather than into dubiously-rated synthetic debt obligations.

If some hot companies go belly up, they shouldn't take the rest of us down with them.

Go deeper: Sign up here for Felix Salmon's Sunday night Edge newsletter, looking ahead to the week in markets and business.

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The financial crisis was shocking because so few people saw it coming, as much of the risk was hidden within complex financial instruments. And that likely means we have known unknowns right now. But here are three top risk factors:

• Politics: The Trump administration has rolled back certain Dodd-Frank reforms, at a time when architects of the 2008 response are asking for new protections. There's also worry over the next debt-ceiling showdown ending in default — possibly resulting in mass repricing of risk across all asset classes, which in turn could precipitate a global financial panic.
• Contagion: Many economists continue to worry about emerging market debt and currencies, particularly as global financial institutions have become more interconnected.
• Cyberattacks: Big financial institutions have collapsed under the weight of market pressures or their own stupidity — but not yet because of digital arsonists inside of their networks. That could change.

What America experienced in 2008 wasn't just the start of a recession, or a negative market cycle. We've had lots of both. Nor was it the realization of an existential outside threat, like war or natural disaster.

• Instead, it was a sudden and pervasive fear that the foundation of America's economy had crumbled, in a way that few had ever previously internalized.

Not paranoia, but justified panic:

• The S&P 500 fell 28% in the 22 trading days after Lehman went bankrupt. It would keep sinking for another six months, losing nearly half its value.
• The VIX, a measure of stock market volatility, had all 10 of its all-time highs in October and November of 2008.
• Gross domestic product shrank by 8.9% in Q4 2008, its worst quarterly mark in 50 years.
• The unemployment rate nearly doubled between January 2008 and January 2010, rising from 5% to 9.8%.
• Home mortgage defaults climbed from 3.66% to 11.54% over the same time period.

🎧 Go deeper in our latest Axios Pro Rata podcast, with Dan Primack and Fox News' Neil Cavuto.

No major Wall Street, real estate or insurance executives were jailed for their roles in nearly destroying the U.S. economy.

• Kevin Puvalowski, a former federal prosecutor, says that the financial crisis was caused by weak regulation combined with unwise decisions, but not ones that were necessarily illegal.
• Jesse Eisinger, author of a book on the subject, places much of the blame on prosecutorial cowardice, in the wake of having convictions overturned in cases related to Enron and Arthur Andersen.

Many still question the light touch:

• Richard Bowen, a former employee in Citigroup's mortgage unit, tells Axios he provided 1,000 pages of documents to the SEC and spoke to prosecutors about certifications of low-quality mortgages that were sold to investors, Freddie Mac, and Fannie Mae.
• But he doesn't know what was ever done with his information.

Go deeper: Courtenay Brown has more in the Axios stream.

College enrollment increased during the Great Recession, as many viewed education as a better option than looking for work in a shrinking job market. For-profit universities, in particular, saw enrollments more than triple.

Why it matters: As a result, millions of students became mired in debt. It also may have increased socio-economic inequality, as research shows that students of for-profit institutions are more likely to be minorities, women, poorer and older.

• The Obama administration implemented new regulations on for-profit schools, requiring proof of a reasonable debt-to-income ratio among graduates in order to receive federal funds.
• The Trump administration is rolling back some of those rules.

Go deeper: The full story from Axios' Stef Kight.

The tech industry experienced the scarring dot-com crash at the start of the decade, giving it a sense of resilience that helped Silicon Valley sustain momentum through the Great Recession as other areas retrenched.

• The tech industry took a slight hit in 2008-2009, then jumped on a bull that's still kicking today, with the Nasdaq rising around 600%.

Modern tech has always been cyclical. But its boom-bust pendulum has been stuck on the side of growth since Lehman went under:

• Cash flooded in during a prolonged era of near-zero interest rates.
• Tech investments from previous eras — in everything from fiber backbones to wireless broadband to more versatile software development tools — delivered particularly big payoffs.

Tech is hardly immune from future downturns, and any number of disasters — from a full-on trade war with China to a massive earthquake along the San Andreas — could trigger a race to the exits.

Go deeper:

• Axios tech editor Scott Rosenberg has the full story.
• Sign up here for our daily Login newsletter on the latest in tech.

For many in the generation of young adults who came of age during the financial crisis, owning big-ticket items like houses and cars is no longer seen as wise — or necessary.

• The bottom line: Formative financial anxieties were cemented just as the iPhone and other mobile devices arrived, enabling the rise of "sharing" and gig-economy services like Airbnb and Uber.

Compared to Baby Boomers at the same age, millennials are:

• More likely to live with their parents.
• Less likely to be homeowners.
• More than twice as likely to be unmarried.
• Less likely to have children

They also have more than three times as much debt, especially from college loans.

• "Millennials want to hold on to the money they have" because they saw their parents lose their jobs and homes, says Morley Winograd, who has written three books about the Great Recession generation.

Go deeper: Courtenay and Kia Kokalitcheva on the recession generation

The 2008 financial collapse did not take the renewables industry down with it — and in several ways it even proved a blessing:

• The 2009 stimulus law funneled some $90 billion into low-carbon energy initiatives.
• The Treasury Department provided over $26 billion in grants for wind and solar power projects, in lieu of tax credits that had been hampered by a collapsed tax equity market.
• The Department of Energy expanded an existing loan guarantee program, which proved pivotal to launching large utility-scale solar power, among other projects. The program is best known for failures like Solyndra, but most of its projects succeeded and were fiscally sound.

But, but, but: The financial crisis wasn't entirely bloodless for renewables. China grabbed the lead in solar manufacturing during this time, and venture capital financing dried up for advanced biofuels.

Go deeper: Sign up here for Ben Geman's Generate newsletter, on all things energy.

America's economy is booming, with stocks setting new records and unemployment hitting its lowest monthly marks since 2000. But the spoils have not been evenly distributed.

Economic opportunity is tied to location, more than ever before, according to a county-by-county report last year from the nonprofit Economic Innovation Group.

• New jobs are clustered in the economy's best-off places, leaving one of every four new jobs for the bottom 60% of zip codes.
• Most of today's distressed communities saw zero net gains in employment and business establishment since 2000. In fact, more than half have seen net losses on both fronts.
• Half of adults living in distressed ZIP Codes are attempting to find gainful employment in the modern economy armed with only a high school education at best.

America's labor force also has become increasingly dependent on large companies, thus narrowing geographic diversity and, arguably, keeping a lid on wage growth.

• The bottom line: The line between success and stagnation can often be drawn on a map.

Go deeper: Share this map

Axios asked several experts to share the greatest long-term consequence of the financial crisis, in just one sentence:

Andrew Ross Sorkin, author of "Too Big To Fail":

"The greatest consequence is misunderstanding of the crisis itself and its lessons — a misappreciation that the reason the crisis was so deep and took so long to recover from was not the policy response, but that prior to the crisis, debt had masked structural problems like wage stagnation, workers leaving the workforce and automation. And we’re still not dealing with them."

Sen. Elizabeth Warren (D-Mass.):

“The crisis cost the average American $70,000 over their lifetimes because greedy bankers gambled with their future and lost — many of those families are still struggling today.”

Nassim Taleb, former trader and author of "The Black Swan":

“The only tangible long term effect has been a marked improvement of my checking account, as well as the vindication of the principle: If you fail to convince them, take their money."

Larry Summers, former U.S. Treasury Secretary:

"Increased distrust in both the competence of elites and their commitment to doing good overall."

Andrei Shleifer, Harvard economics professor and author of "A Crisis of Beliefs":

"Ignite the culture wars, brewing since Nixon, into a full blown electoral and increasingly violent conflict."

Kevin Warsh, former Federal Reserve governor:

"Too many Americans lost trust in our system of governance, lost belief in the market economy, and lost confidence in the American Dream. That faith must be revived, restored, and reaffirmed before the next economic downturn."

Marc Andreessen, venture capitalist and Facebook board member:

"Paranoid conspiracy politics on the left and the right."

Gene Sperling, former director of the National Economic Council:

"I hope one of the greatest long-run consequences of the financial crisis will be the creation, survival and strengthening of the CFPB — because a full-time financial champion for typical consumers was desperately needed, and filled a gaping hole in our regulatory framework."

Neal Wolin, former deputy Treasury Secretary:

"Hopefully, the massive economic and financial disruptions to families, businesses and the country have helped the financial services sector and its regulators, globally, understand and remember the critical importance of recognizing and managing financial risk."