STEVE INSKEEP, HOST:
Ten years ago this weekend, the investment bank Lehman Brothers collapsed. A company that survived world wars and the Great Depression closed its doors in a signal moment of the financial crisis. David Wessel covered that crisis for The Wall Street Journal and later wrote the book "In Fed We Trust." He's with us once again. David, good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: What went wrong?
WESSEL: Well, you know, that's a question that economic historians are going to be asking and answering for decades, but here's my quick take. Americans - ordinary Americans and big Wall Street banks bet that housing prices would never fall, and they did. They fell a lot. That was the trigger for a widespread financial panic.
INSKEEP: I think people didn't even realize they were betting. They thought that was a basic reality, like the sun rising, that the housing prices over time would always rise.
WESSEL: Absolutely. They've been told for years that housing prices may go down in one community but not another. But the housing crisis alone didn't do this. It triggered a financial panic, a run on the entire financial system - not this time on the banks with depositors lining up but on the short-term borrowing that all sorts of big financial institutions relied on. And, you know, when that happens, the financial system moves credit around the economy the way blood moves through the circulatory system. The financial system froze up. And with that, the economy collapsed. And with a lot of creativity, controversy and effort, the U.S. government got things going again. But it turns out that even though they avoided a repeat of the Great Depression, we had a terrible recession. And they got a lot of blame for not having avoided it in the first place.
INSKEEP: Well, let's talk a little bit about the blame and also about what really happened here. If we look in a broader frame, was economic inequality part of the problem here? You had lots of people who'd been living on less and less over time, or feeling like they weren't getting ahead and ending up borrowing too much for a house, borrowing against the house to pay expenses. That was part of the crisis that built up over time, wasn't it?
WESSEL: Absolutely. I mean, there's an economist at the University of Chicago, Raghuram Rajan, who has written a book that argues that one of the causes of the whole thing was that since incomes for ordinary Americans weren't going up but their eagerness to live well - perhaps as well as their neighbors or the people they saw on TV - continued to grow, the only way to do it was to borrow. And it turned out the financial system was more than happy to lend them money, including some people who couldn't afford to pay it back, as long as they could then get someone else to carry the loan by turning it into some fancy security that was sold to a bank in Germany.
INSKEEP: And I think we're getting a sense here of why it was that people got so angry. They were already strained before the crisis. The crisis strikes. A lot of people are wiped out. Their home value is wiped out. And suddenly, it's decided that the way to fix this is to bail out giant banks after Lehman Brothers collapsed.
WESSEL: That's right. So some of the roots of this populism and this anger predate the crisis, as you suggest. There was a lot of inequality, a lot of angst about trade and immigration. The crisis made it worse, but people fail to understand - and the leadership failed to explain well enough - why it was that you had to bail out the banks in order to save the economy and save Main Street.
INSKEEP: Very briefly, is the economy any safer today than it was a decade ago?
WESSEL: I think Christine Lagarde at the International Monetary Fund put it very well - safer but not safe enough.
INSKEEP: What does that mean?
WESSEL: It means that we did some things to restrain the banks from making the same mistakes again. They have much bigger capital cushions to absorb losses. But we've taken away some of the tools that the authorities used the last time so that if we have another crisis, they won't be able to do all the same things again. That may make people happy today. They may regret it in the future.
INSKEEP: David, always a pleasure talking with you. Thank you very much.
WESSEL: You're welcome.
INSKEEP: That's David Wessel of the Hutchins Center at the Brookings Institution.
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