JUDY WOODRUFF: It was one of the most profound
events in generations, with huge consequences
for on the American economy and households
throughout the country.
This was the time a decade ago when the financial
crisis erupted, a crash that most experts
didn't foresee.
Its effects, and of the recession that followed,
on income, wealth inequality, and our politics
are still with us.
Tonight, our economics correspondent, Paul
Solman, revisits how it all went down, and
the impact today of decisions made then.
It's part of our weekly series, Making Sense.
PAUL SOLMAN: So, this is where, in some sense,
the crisis began.
ADAM TOOZE, Columbia University: Yes, this
was the place where people were stumbling
out of offices on the 15th of September, 2008,
the world having ended.
PAUL SOLMAN: The midtown Manhattan headquarters
of Lehman Brothers, whose collapse 10 years
ago this week was the signal event of the
2008 financial crisis.
ADAM TOOZE: It started in real estate, and
it started with subprime, and that's the story
everyone knows.
How does that crisis in the suburbs of America
move all the way back to the center of finance
in New York?
PAUL SOLMAN: OK.
How does it?
ADAM TOOZE: Banks are fragile things.
Classically, we think of them as being funded
by deposits, with households putting their
savings into the bank, and then the householders
begin to get panicked and take all their money
out.
PAUL SOLMAN: But, says economist and historian
Adam Tooze, author of the new book "Crashed":
ADAM TOOZE: Banks like Lehman don't have deposits.
What they do is borrow money from other banks,
and that money runs faster than any depositor
can run.
PAUL SOLMAN: So subprime mortgages begin to
default.
Lots of people are invested in those mortgages.
Banks have a big stake.
And so suddenly, when banks look vulnerable,
then they don't lend to each other anymore,
investors pull back.
That's what happened?
ADAM TOOZE: Yes, that's the crucial thing.
Afterwards, there was a congressional inquiry
that went after the banks for selling the
bad securities to investors who ended up being
ripped off.
That wasn't in fact the dangerous bit.
The real problem were the bad debts, the securities
that America's banks kept on their balance
sheets.
PAUL SOLMAN: In other word, Lehman not only
created debt securities, bonds, backed by
iffy subprime mortgages.
It held on to them.
When the debts started going bad, faith in
Lehman collapsed.
No faith, no credit.
No credit, no Lehman.
ADAM TOOZE: We came as close as we have ever
come in history to a total cardiac arrest,
not just of the American economy, but the
entire world economy.
PAUL SOLMAN: Meaning everybody is afraid to
lend to everybody else.
Credit simply freezes, and an economy, a modern
economy can't function that way?
ADAM TOOZE: A modern economy can't function
without credit for more than even a couple
of hours, frankly, seconds.
G.E., the pillar of American manufacturing,
was having a hard time getting short-term
credit.
So was Harvard University.
Wage bills were not being paid.
PAUL SOLMAN: And soon enough, the whole world
was watching, and enmeshed.
To illustrate your point about how the crisis
spread globally, I thought we'd go to a Greek
food stand.
But you said, no, no, an Irish pub.
And, lo and behold, there's one right across
the street from the old Lehman.
ADAM TOOZE: Yes, because 2008 is all about
banks.
And the failure of the Irish banks in September
2008 is really the moment when the panic spreads
to Europe in a way that the European states
ultimately find almost impossible to handle.
PAUL SOLMAN: Because European banks have a
stake in Irish banks?
ADAM TOOZE: All of Europe is tied up with
the Irish banking boom, as using Dublin as
an offshore financial center.
And Dublin finds itself in a position on the
29th of September of having to guarantee the
entire balance sheet of the Irish banking
system.
PAUL SOLMAN: Back in the U.S. of A., September
29 was also the day Congress rejected President
Bush's bailout bill.
WOMAN: The motion is not adopted.
PAUL SOLMAN: And the Dow fell a record 777
points.
ADAM TOOZE: This is where the crisis goes
from being a banking crisis to a crisis of
the American economy as a whole, with stock
market values crashing in September 2008.
PAUL SOLMAN: We were now in the belly of the
beast.
ADAM TOOZE: So, here we have Wall Street with
all the global banks, and then over here,
the New York Stock Exchange.
PAUL SOLMAN: Which is where we are now.
ADAM TOOZE: Which is where we are now.
And the heart of the crisis-fighting effort,
the Federal Reserve Bank of New York.
PAUL SOLMAN: Ground zero 9/29, the New York
Fed.
Here is where the system was saved.
And what the New York Fed decided to do, what
the United States Federal Reserve system decided
to do was play the classic role it's always
intended to play, to be the lender of last
resort to American financial institutions.
ADAM TOOZE: Yes.
There's a lot of emphasis, for obvious reasons,
on the unconventional side of Fed policy in
'08, the bailouts, taking equity stakes in
banks or quantitative easing.
But what really made the difference in the
survival of the American and the global banking
system in September 2008 was indeed liquidity
provision, to take an asset which is very
unattractive to sell in the moment of the
crisis because its value may be suspect.
PAUL SOLMAN: Assets like loans backed by failing
mortgages, which the Fed took off the hands
of the banks.
ADAM TOOZE: And to give you in exchange a
cash loan that will tide you over for a matter
of days, weeks or months.
PAUL SOLMAN: Ready cash.
liquidity.
And this saved the American financial system?
ADAM TOOZE: This didn't just save the American
financial system.
It saved the financial system of the world.
More than half of the liquidity provision
to large banks in the United States was to
European banks in the United States, and then
on top of that, the Fed lent $4.5 trillion
to European and Asian central banks, who indirectly
provided dollars to their local banks in Europe
and in Japan.
PAUL SOLMAN: And this, says Adam Tooze, is
the key to understanding the crash of '08:
a global financial crisis because of global
financial interconnectedness, a crisis that
would have been far worse had the U.S. not
dispensed dollars worldwide.
ADAM TOOZE: Wall Street is a global banking
center.
So you have banks from all over the world.
And the Fed is providing them liquidity not
out of the goodness of its heart, but to stabilize
the American financial system, to stabilize
the American housing market.
PAUL SOLMAN: And to stabilize the intricately
interconnected global financial system, with
players like Barclays of London, which bought
the remains of Lehman.
ADAM TOOZE: Yes, Barclays got hundreds of
billions in liquidity too.
PAUL SOLMAN: So, in the end, the system worked,
right?
I mean, we're on Wall Street, stock market
almost double what it was before the crash.
ADAM TOOZE: Well, it did, if you happened
to be one of the minority of Americans who
actually has stock.
Most Americans don't.
And large parts of America have not recovered
from the crisis.
The San Francisco Fed was estimating that,
as a result of the lost growth in the U.S.
economy, the decade in which America grew
below where it might otherwise have been,
the recession probably cost the average American
about $70,000.
PAUL SOLMAN: Seventy thousand dollars in lifetime
income, that is.
ADAM TOOZE: So that is not something we're
ever going to get back, regardless of what
happens in the stock market.
PAUL SOLMAN: Which prompted a final question,
about the political ramifications of the crash
of '08, at a final location.
ADAM TOOZE: This is Zuccotti Park, just by
Wall Street, the site of the famous encampment
in 2011 that spawned Occupy and the discourse
of the 1 percent against the 99 percent, the
place where inequality in America today was
really put back on the political map.
Huge rage against bailing out the banks.
And the other great political reaction to
the crisis came two years earlier in the form
of the Tea Party, the idea that irresponsible
borrowers who had taken on debts they couldn't
afford were now going to be rescued by the
federal government.
One opens, if you like, the door to a more
radical politics on the right.
The other opens the door to a more radical
politics on the left.
PAUL SOLMAN: Which is, of course, just where
we are on the 10th anniversary of the crash
of '08.
For the "PBS NewsHour," this is economics
correspondent Paul Solman, reporting from
New York.
