Tag Archives: The Great Recession

The end of the American middle class

This is what it looks like

Prior to the Great Recession, Adkins owned and ran a successful plant nursery in Moab, Utah. At its peak, it was grossing $300,000 a year. She had never before been unemployed – she’d worked for 40 years, through three major recessions. During her first year of unemployment, in 2010, she wrote three or four cover letters a day, five days a week. Now, to keep her mind occupied when she’s not looking for work or doing odd jobs, she volunteers at an animal shelter called the Santa Barbara­ Wildlife Care Network. ("I always ask for the most physically hard jobs just to get out my frustration," she says.) She has permission to pick fruit directly from the branches of the shelter’s orange and avocado trees. Another benefit is that when she scrambles eggs to hand-feed wounded seabirds, she can surreptitiously make a dish for herself.

By the time Adkins goes to bed – early, because she has to get up soon after sunrise, before parishioners or church employees arrive – the four other people who overnight in the lot have usually settled in: a single mother who lives in a van with her two teenage children and keeps assiduously to herself, and a wrathful, mentally unstable woman in an old Mercedes sedan whom Adkins avoids. By mutual unspoken agreement, the three women park in the same spots every night, keeping a minimum distance from each other. When you live in your car in a parking lot, you value any reliable area of enclosing stillness. "You get very territorial," Adkins says.

Each evening, 150 people in 113 vehicles spend the night in 23 parking lots in Santa Barbara. The lots are part of Safe Parking, a program that offers overnight permits to people living in their vehicles. The nonprofit that runs the program, New Beginnings Counseling Center, requires participants to have a valid driver’s license and current registration and insurance. The number of vehicles per lot ranges from one to 15, and lot hours are generally from 7 p.m. to 7 a.m. Fraternization among those who sleep in the lots is implicitly discouraged – the fainter the program’s presence, the less likely it will provoke complaints from neighboring homes and churches and businesses.

The Safe Parking program is not the product of a benevolent government. Santa Barbara’s mild climate and sheltered beachfront have long attracted the homeless, and the city has sometimes responded with punitive measures. (An appeals court compared one city ordinance forbidding overnight RV parking to anti-Okie laws in the 1930s.) To aid Santa Barbara’s large homeless population, local activists launched the Safe Parking program in 2003. But since the Great Recession began, the number of lots and participants in the program has doubled. By 2009, formerly middle-class people like Janis Adkins had begun turning up – teachers and computer repairmen and yoga instructors seeking refuge in the city’s parking­ lots. Safe-parking programs in other cities have experienced a similar influx of middle-class exiles, and their numbers are not expected to decrease anytime soon. It can take years for unemployed workers from the middle class to burn through their resources – savings, credit, salable belongings, home equity, loans from family and friends. Some 5.4 million Americans have been without work for at least six months, and an estimated 750,000 of them are completely broke or heading inexorably toward destitution. In California, where unemployment remains at 11 percent, middle-class refugees like Janis Adkins are only the earliest arrivals. "She’s the tip of the iceberg," says Nancy Kapp, the coordinator of the Safe Parking program. "There are many people out there who haven’t hit bottom yet, but they’re on their way – they’re on their way."

Kapp, who was herself homeless for a time many years ago, is blunt, indefatig­able, raptly empathetic. She works out of a minuscule office in the Salvation Army building in downtown Santa Barbara. On the wall is a map encompassing the program’s parking lots – a vivid graphic of the fall of the middle class. Kapp expects more disoriented, newly impoverished families to request spots in the Safe Parking program this year, and next year, and the year after that.

"When you come to me, you’ve hit rock bottom," Kapp says. "You’ve already done everything you possibly could to avoid being homeless. You maybe have a teeny bit of savings left. People are crying, they’re saying, ‘I’ve never experienced this before. I’ve never been homeless.’ They don’t want to mix with homeless people. They’re like, ‘I’m not going over to those people’ – sometimes they call them ‘those people.’ So now they’re lost, they’re humiliated, they’re rejected, they’re scared, and they’re very ashamed. I’m worried about the psychological damage it does when you have a place and then, all of a sudden, you’re in your car. You have to be depressed just from the fall itself, from losing everything and not understanding how it could happen."

Then there is this.

The next thing welfare applicants must do is disclose every possession and conceivable source of income they have. "I can’t tell you how many people come to my office and say, ‘I couldn’t get food stamps because my car is worth too much,’" Kapp tells me. "OK, you have a car. But you’ve lost everything – your house, your job, your pride – and all you have left is that car and all of your belongings in it. And they say, ‘You still have too much. Lose it all.’ You have to have nothing, when you already have nothing."

Janis Adkins hadn’t been back in Santa Barbara long before she needed to apply for government assistance. She had never asked for aid before. At the California Department of Social Services, she filled out the form for emergency food stamps.

"I didn’t wear my best clothes, but I wore a light blouse and jeans, and I guess I was just a little too dressed up," she recalls. "Because the woman just looked at me and said, ‘Are you in a crisis? Your application says you’re in a crisis.’ I said, ‘I’m living in a van and I don’t have a job. I have a little bit of money, but it’s going to go fast.’ The woman said, ‘You have $500. You’re not in a crisis if you have $500.’ She said anything more than $50 was too much."

If Adkins had filled her tank with gas, done her laundry, eaten a meal, and paid her car insurance and phone bills, it would have used up half of everything she had. But emergency food stamps, she was told, are not for imminent emergencies; they’re for emergencies already in progress. You can’t get them if you can make it through the next week – you have to be down to the last few meals you can afford.

"The money’s for my phone, it’s for gas, it’s for my bills," Adkins said.

"Why are you in a crisis," the woman asked, "when you have a phone bill?"

"I need the phone so I can get a job. You can’t look for a job without a phone."

"Why do you have bills?" the woman asked. "I thought you didn’t have a place to live."

"I live in my van," Adkins said. "I have insurance."

"You have a 2007 van," the woman said. "I think you need to sell that."

"Please, I need a break," Adkins said. "I need some help. I need to take a shower."

"Why didn’t you have a shower?"

"I live in a van."

The woman told Adkins to come back when she really needed help.

This is the saddest and probably most messed up thing I have read in a long time. 

The Lost Generation

America’s lost generation

The world has seen a number of lost generations in the past century. Gertrude Stein first coined the term in 1920s in reference to the Europeans who grew up during World War I, but it’s most recently referred to Japanese youth who grew up during that country’s recession in the 1990s. In Japan, the lost youth are referred to as the hikikomori, and the decade of widespread unemployment meant that many of them never had the chance to start careers. In the 10 years of recession in Japan the number of young people working temporary or contract jobs doubled, and the collective hopelessness lead to a sky-rocketing suicide rate. Michael Zielenziger described the generation in his 2006 book Shutting Out the Sun: How Japan Created Its Own Lost Generation:

Across Japan, more than one million men and boys like Jun and Hiro and Kenji have chosen to withdraw completely from society. These recluses hide in their homes for months or years at a time, refusing to leave the protective walls of their bedrooms. They are as frightened as small children abandoned in a dark forest. Some spend their days playing video games. A few–an estimated 10 percent–surf the Internet. Many just pace, read books, or drink beer and shochu, a Japanese form of vodka. Others do nothing for weeks at a time.

Obviously, the Japanese and American cultures are incredibly different, and it’s impossible to do an apples-to-apples comparison of the two young generations. However, the new census data reads like a warning sign that American youth are increasingly challenged by listlessness, and it will likely lead to future consequences. "Many young adults are essentially postponing adulthood and all of the family responsibilities and extra costs that go along with it," assistant vice president of the Population Research Bureau told the AP. "Some of these changes started before the recession but now they are accelerating, with effects on families that could be long term."

How the Great Reset has already changed America

From Richard Florida in The Atlantic

As many of our cities and older inner-ring suburbs are being renovated and revitalized, the great challenge of our time — far bigger than urban renewal was in decades past — is to remake our many shoddily-built, far-off exurbs into denser, more- connected, more livable communities. Some of them — the ones that were built as much to keep the building boom going as because people needed to live in them — might be fated to shrink back into small towns or disappear altogether.

In my travels across the country, I’ve heard from people who are in the process of resetting their lives. Young people just out of college tell me that they don’t want their parents’ suburban lifestyle; they’d prefer to find an affordable rental apartment in a city they love where economic opportunities are better. They don’t want to go into hock buying a big house and a big car, just so they can endure a long commute.

Young parents tell me they’ve had to defer their dream of buying a bigger house with a backyard, either because they can’t afford it or don’t qualify for a mortgage. Instead, they’ve decided to stay put and renovate their city apartment or fix up their small house in an older, closer-in suburb. Empty nesters tell me they’ve decided to sell the big house, sometimes for a lot less than they could have gotten for it a few years ago, and buy a smaller condo or house closer to their kids in the city.

These shifts, brought on by economic exigencies, are already adding up to a gradual but enduring change in the way we live — one that will prove every bit as consequential as the move towards suburban living was in the 1950s and 1960s.

The People vs. Goldman Sachs

You may not want to read this if you have heart or problems with high blood pressure

Levin couldn’t believe what he was hearing. "Heck, yes, I was offended," he says. "Goldman’s CEO claimed the firm ‘didn’t have a massive short,’ when the opposite was true." First of all, in Goldman’s own internal memoranda, the bank calls its giant, $13 billion bet against mortgages "the big short." Second, by the time Sparks and Co. were unloading the Timberwolves of the world on their "unicorns" and "flying pigs" in the summer of 2007, Goldman’s mortgage department accounted for 54 percent of the bank’s risk. That means more than half of all the bank’s risk was wrapped up in its bet against the mortgage market — a "massive short" by any definition. Indeed, the bank was betting so much money on mortgages that its executives had become comically blasé about giant swings on a daily basis. When Goldman lost more than $100 million on August 8th, 2007, Montag circulated this e-mail: "So who lost the hundy?"

This month, after releasing his report, Levin sent all of this material to the Justice Department. His conclusion was simple. "In my judgment," he declared, "Goldman clearly misled their clients, and they misled the Congress." Goldman, unsurprisingly, disagreed: "Our testimony was truthful and accurate, and that applies to all of our testimony," said spokesman Michael DuVally. In a statement to Rolling Stone, Goldman insists that its behavior throughout the period covered in the Levin report was consistent with responsible business practice, and that its machinations in the mortgage market were simply an attempt to manage risk.

It wouldn’t be hard for federal or state prosecutors to use the Levin report to make a criminal case against Goldman. I ask Eliot Spitzer what he would do if he were still attorney general and he saw the Levin report. "Once the steam stopped coming out of my ears, I’d be dropping so many subpoenas," he says. "And I would parse every potential inconsistency between the testimony they gave to Congress and the facts as we now understand them."

I find it harder and harder to believe that no one has gone to jail or been held accountable for their actions in the sub-prime crisis.  No one.

There was no stimulus

i was just looking at Paul Krugman’s blog and points out that the stimulus never really happened.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending. Here’s total (all levels) government spending over the past 10 years:

Did the stimulus even happen?

Looking at this graph, if you didn’t know there had been a “massive” stimulus, would you even have suspected that there had been any stimulus at all?

And yet the failure of the stimulus that never happened has become conventional wisdom — which is what I feared would happen, two years ago, when I was tearing my hair out over the inadequacy of the original plan.

Yes, I know, it’s argued that Obama couldn’t have gotten anything more. I don’t really want to revisit all of that; my point here is simply that everyone is drawing the wrong lesson. Fiscal policy didn’t fail; it wasn’t tried.

How the Recession Has Changed Poverty in Canada

From the Canadian Centre for Alternative Policy Options

Every recession ushers in a rising tide of poverty. As jobless and underemployed people struggle to make ends meet, the nouveau poor swell the ranks of the déjà poor.

The most recent statistical update on incomes in Canada was released in June, telling us that in 2008, as the nation headed into a brutal recession, there were just over 3 million Canadians living in poverty in this country using the standard measure, Statistic Canada’s after-tax low-income cut-off (LICO).

Statistics on annual income data come in two years after the fact and much has happened in this country since 2008. But if past recessions are any guide, between 750,000 and 1.8 million more Canadians will be counted as poor before recovery is complete. More than one in seven Canadians may have tumbled into poverty before this is over. Many of them will be working.

The greatest increase in poverty will be among working age adults (18 to 64 years of age) and they will pull along hundreds of thousands of children who live with them.

For the first time in decades, we may also see a sobering increase in the number of seniors coping with low income, a phenomenon which did not occur in previous recessions but has already reared its head in these new numbers.

England of 2011 will like like England of 1931

Stinging critique of David Cameron’s deficit fighting by Paul Krugman

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.

Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

So much for the Chretien way in the United Kingdom

I know Canada had a slightly smaller deficit than the United Kingdom’s – It was 9.1% or 39bn Canadian dollars versus a U.K. deficit of 11.5% or £156bn but these cuts proposed by David Cameron are mind boggling.

Look at these numbers

During his address to MPs, it was clear that few government departments have been spared.

The national health service, pre-university education and international development budgets will be protected from the cuts — but the policing budget will fall by four per cent each year. The Justice Ministry must cut its budget by six per cent per year, but funding for fighting terrorism would be maintained.

The Foreign Office will see a 24 per cent budget cut and the British Broadcasting Corp. will be required to take on the full cost of running the world service.

Welfare funding will also be reduced and the minimum age for people seeking state pensions will be raised earlier than previously expected.

Osborne said that even the Queen would be affected, as the royal household budget will be cut by 14 per cent over four years.

In addition to these cuts, social housing is cut by 50% and the English military is being cut back to the point where even the United States is worried about it and it wasn’t exactly flush with cash before.

As a result, it will be virtually impossible for the UK to offer any meaningful military assistance to the U.S. in the future. The overstretched and under-equipped Ministry of Defense can barely function as it is. The major shortage of helicopters in Afghanistan is now well established, with a parliamentary committee reporting last year that the lack of helicopters was having “adverse consequences” for Britain. Up to two-thirds of the Apache attack helicopter fleet has been described by the Ministry of Defense as “unfit for purpose.” Last July, a plan to severely diminish the threat of Taliban improvised explosives devices (IEDs) – responsible for more NATO troop deaths than any other tactic – was scrapped due to insufficient troop numbers and helicopters. A month later, British soldiers were forced to protect the remains of a senior officer killed by a roadside bomb for three days before a helicopter was available to collect his body.

The shortages-problem is endemic. A lack of heavily armored vehicles meant two soldiers were killed by a roadside bomb in Iraq. Army doctors lack basic equipment, such as surgical tools. A coroner at an inquest into the deaths of two soldiers in Afghanistan labeled the Ministry of Defense’s inability to provide basic equipment “unforgivable and inexcusable.” Four soldiers killed this year in Helmand did not have enough metal detectors available to trace bombs, and soldiers are even forced to dye their own uniforms due to a lack of camouflaged shirts.

As the Pittsburgh Post-Gazette puts it…

As part of the plan, 20,000 British forces will withdraw from their post-World War II-era bases in Germany by 2020, and overall, British troops and civilian defense personnel will be slashed by 42,000.

The equipment cuts, including early decommissioning of the Royal Navy’s flagship aircraft carrier, will force Britain to forfeit its ability to launch fighter jets from sea until at least 2019. The fleets of Harrier fighter jets are being eliminated. The planned Nimrod MRA4 Reconnaissance aircraft, previously billed by the Royal Air Force as a "significant contribution" to the fight against terrorism, is also being scrapped.

In total, over 500,000 public sector jobs could be lost.

It’s interesting to see that while the Chretien spending cuts hit all departments, they weren’t as deep.

Mr Chretien used the phrase "nothing off the table".

By contrast, Mr Cameron has already pledged to ring-fence the education, health and international aid budgets.

With extensive cuts to healthcare and education spending at the very centre of Canada’s deficit reduction work, many Canadian economists argue that it could not have been successful if they had been excluded.

The impact was, however, severe.

Dark days ahead for a lot of people in the United Kingdom.  The next couple of years won’t be a lot of fun.

Unemployed: The New Normal?

Disturbing article in the New York Times today about long term employment prospects in the United States.

The “new normal,” as it has come to be called on Wall Street, academia and CNBC, envisions an economy in which growth is too slow to bring down the unemployment rate, while the government is forced to intervene ever more forcefully in a struggling private sector. Stocks and bonds yield paltry returns, with better opportunities available for investors overseas.

If that sounds like the last three years, it should. Bill Gross and Mohamed El-Erian, who run the world’s largest bond fund, Pimco, and coined the phrase in this context, think the new normal has already begun and will last at least another three to five years.

The new normal challenges the optimism that’s been at the root of American success for decades, if not centuries. And if it is here, the new normal could force Democrats and Republicans to rethink their traditional approach to unemployment and other social problems.

Some unusual suspects, like Glenn Hubbard, dean of the Columbia Graduate School of Business and an economic adviser to George W. Bush, are talking about a new, expanded role for the government in addressing the problem. In particular, Mr. Hubbard favors investing more in education to retrain workers whose jobs are never coming back. “If there is a new normal, it’s more about the labor market than G.D.P.,” he said. “We have to help people face a new world.”

As Frank Rich points out in his NY Times column today, “16.5 percent of America’s workers are now either unemployed and trying to find a job, involuntarily working part time, or have stopped looking for work altogether.”  The prospects look even worse when you look at the financial shape of many municipalities and civic governments.

Faced with the steepest and longest decline in tax collections on record, state, county and city governments have resorted to major life-changing cuts in core services like education, transportation and public safety that, not too long ago, would have been unthinkable. And services in many areas could get worse before they get better.

The length of the downturn means that many places have used up all their budget gimmicks, cut services, raised taxes, spent their stimulus money — and remained in the hole. Even with Congress set to approve extra stimulus aid, some analysts say states are still facing huge shortfalls.

Cities and states are notorious for crying wolf around budget time, and for issuing dire warnings about draconian cuts that never seem to materialize. But the Great Recession has been different. Around the country, there have already been drastic cuts in core services like education, transportation and public safety, and there are likely to be more before the downturn ends. The cuts that have disrupted lives in Hawaii, Georgia and Colorado may be extreme, but they reflect the kinds of cuts being made nationwide, disrupting the lives of millions of people in ways large and small.

Of course there is also the impact on the American family.  While we tend to romanticize The Great Depression, it was a horrible experience for most families.

The poor are getting poorer, and the rich, despite stock-market setbacks, are still comparatively rich. The most devastating losses in household wealth over the past two years have been suffered by the middle class. And families are fraying at the seams. The Pew poll showed nearly half of people who had been unemployed for more than six months saying their family relationships had become strained, and a New York Times/CBS poll of unemployed adults last winter found about 40 percent saying they believed their joblessness was causing behavioral change in their children.

Parents who have jobs are working longer hours than ever. Mothers are taking shorter maternity leaves. The birth rate is on the decline. The divorce rate is declining, too — it’s too expensive for people to break up their households — but that’s not necessarily a family-friendly thing, as a report from the Council on Contemporary Families noted in April: “We know from the experience of the Great Depression of the 1930s that divorce rates can fall while family conflict and domestic violence rates rise.”

The death of a dream?

We are seeing the end of middle class America.

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the multiple is above 300.

The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.

Here’s another way to look at the problem

Statistics only capture one slice of the problem. But it is the renowned Harvard economist, Larry Katz, who offers the most compelling analogy. “Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”

It’s not going to change anytime soon

Every now and then the Freemans invite their neighbours round to their front porch, to watch the world go by, drink beer and eat Connie’s justly renowned dish of ­Minnesota wild rice. In the best American spirit, Mark and Connie are active neighbourhood people. They are the types who shovel your snow, volunteer for school events, and coach the baseball little league – Mark has done all three.

It takes optimism to be like this. But in the past few years the Freemans have been running low on it. “I guess the penny dropped in the last 18 months when we finally realised that it’s always going to be like this – we are never going to be able to retire on our savings,” says Connie. “As for Andy,” she says, referring to her painfully shy but acutely observant son, “the future really frightens me. If you’re young, it’s bad enough nowadays. But for a kid with autism?”

The entire article is a good one, talks about how the high cost of education, rising rents and a host of other factors that have contributed to the death of the American dream.

via

The Great Recession’s Impact

Robert J. Samuelson in today’s Washington Post on how The Great Recession has a stranglehold on us all.

One paradox identified by Pew is that some groups that "have been hardest hit by this recession (including blacks, young adults and Democrats) are significantly more upbeat than their more sheltered counterparts (including whites, older adults and Republicans) about a recovery." For instance: Blacks suffer higher unemployment than whites (15.4 vs. 8.6 percent in June) but believe more strongly that the recovery has begun (47 to 38 percent). Pew’s explanation is politics. With a Democratic administration, Democrats are more upbeat and Republicans more glum.

Another theory — more powerful, I think — is that the Great Recession, though jarring to almost everyone, has been most disruptive and disillusioning to those who were previously the most protected. It punctured their cocoons so unexpectedly that they became more cautious and fearful, whereas those who even in good times faced job loss and income shifts (many blacks, the young and the poor) were less surprised. One legacy of the Great Recession is that insecurity and uncertainty have gone upscale. People feel more exposed. They tend to plan for the worst rather than hope for the best. Their reluctance to make major purchase commitments (a new car or home) validates their pessimism by retarding recovery.

Great Depression 2.0

How close did we come to a depression?  Pretty close according to Newsweek.

"Depression" is a term of art. It’s more than a serious economic downturn. What distinguishes a depression from a harsh recession is paralyzing fear—fear of the unknown so great that it causes consumers, businesses, and investors to retreat and panic. They hoard cash and desperately curtail spending. They sell stocks and other assets. A devastating loss of confidence inspires behavior that overwhelms the normal self-correcting mechanisms (lower interest rates, inventory resupply, cheap prices) that usually prevent a recession from becoming deep and prolonged: a depression.

We came pretty close to that last year.

Thus traumatized, the economy might have gone into a free fall ending in depression. Indeed, it did go into free fall. The anniversary of Lehman Brothers’ bankruptcy in September inspired much commentary that saving the investment bank wouldn’t have averted crisis. True. But allowing Lehman to fail almost certainly made the crisis worse. By creating more unknowns—which companies would be rescued, how much were "toxic" securities worth?—it converted normal anxieties into abnormal fears that triggered panic.

As credit markets froze, stock prices collapsed. By year-end, the Dow Jones industrial average was down 23 percent from its pre-Lehman level and 34 percent from a year earlier. Financial panic poisoned popular psychology. In September, the Conference Board’s Consumer Confidence Index was 61.4. By February, it was 25.3. Shoppers recoiled from buying cars, appliances, and other big-ticket items. Spending on such "durables" dropped at a 12 percent annual rate in 2008’s third quarter and at a 20 percent rate in the fourth. With a slight lag, businesses canned investment projects; that spending fell at a 20 percent rate in the fourth quarter and a 39 percent rate in 2009’s first quarter.

So why didn’t the economy keep tail spinning out of control?

That these huge declines didn’t lead to depression mainly reflects, as Romer argues, countervailing government actions. Private markets for goods, services, labor, and securities do mostly self-correct, but panic feeds on itself and disarms these stabilizing tendencies. In this situation, only government can protect the economy as a whole, because most individuals and companies are involved in self-defeating behavior of self-protection.

Government’s failure to perform this role in the early 1930s transformed recession into depression. Scholars will debate which interventions this time—the Federal Reserve’s support of a failing credit system, the TARP, guarantees of bank debt, Obama’s "stimulus" plan and bank "stress test"—counted most in preventing a recurrence. Regardless, all these complex measures had the same psychological purpose: to reassure people that the free fall would stop and, thereby, curb the fear that would perpetuate a free fall. Confidence had to be restored so that the economy’s normal recovery mechanisms could operate. That seems to have happened. By September, the Consumer Confidence Index had rebounded to 53.1. Housing prices had stopped falling. By the Case-Shiller index, they’ve increased for three months.