September 2018, Dean Baker

It is ten years since we were at the peak of the financial crisis — the collapse of Lehman Brothers, an investment bank. This sent tremors throughout the world, and media outlets began talking about a return of the Great Depression. While the fear generated by politicians and media was able to get enough support for saving the financial industry, the country was left to deal with the painful fallout from a collapsed housing bubble. Millions lost their homes and jobs. Even a decade later, by some measures, most notably prime-age employment rates, the labor market has still not recovered.

This discussion makes several points concerning the bubble and its collapse. First and foremost, it argues that the primary story of the downturn was a collapsed housing bubble, not the financial crisis. Prior to the downturn, the housing bubble had been driving the economy, pushing residential construction to record levels as a share of GDP. The housing wealth effect also led to a consumption boom. The saving rate reached a record low. When the bubble burst, it was inevitable that these sources of demand would disappear and there were no easy options for replacing them, except very large government budget deficits.

PDF pdf_small | Flash  | Press Release