Decade later: Safer financial system yet much hasn't changed

On the brink of crumbling a decade ago, America's financial system was saved by an extraordinary rescue that revived Wall Street and the economy yet did little for individuals who felt duped and left to suffer from the reckless bets of giant banking institutions.

The government intervention shored up the banking system, allowed credit to flow freely again and helped set the economy on a path toward a painfully slow but lasting recovery from the Great Recession.

In the process, though, millions endured job losses, foreclosures and a loss of financial security and struggled to recover with little outside help. For many, faith in homeownership, the financial markets and a government-provided security net never quite felt secure again.

Even with the economy roaring this year, 62 percent of Americans say the country is heading in the wrong direction, according to an August survey by The Associated Press and the NORC Center for Public Affairs Research.

Still, by pretty much any measure, the picture was far bleaker a decade ago. Home prices had sunk, and mortgages were going unpaid. Layoffs had begun to spike. The tremors intensified as Lehman Brothers, a titan of Wall Street, surrendered to bankruptcy on Sept. 15, 2008. Stock markets shuddered and then collapsed in a panic that U.S. government officials struggled to stop.

Desperate, the government took steps never tried before. It flooded the economy with $1.5 trillion in stimulus over five years. To keep loan rates low, the Federal Reserve slashed its benchmark rate to a record-low near zero and bought trillions in Treasurys and mortgage bonds. Stricter rules, intended to prevent a future catastrophe, were passed.

Stocks not only recovered; they soared. Unemployment plunged from 10 percent to the current 3.9 percent, near a 50-year low.

The stock market gains, though, flowed mostly to the already affluent. Homeownership, the primary source of wealth for most American households, declined.

And while risky mortgages are much less common, student debt has exploded. Anxiety persists as racial and political tensions have intensified in a nation that is increasingly diverse and cleft by a widening wealth gap.

-- Josh Boak.

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BANKS ARE A LOT BIGGER, AND JUST AS POWERFUL

Ten years ago, American taxpayers had collectively rescued the nation's biggest banks to the tune of $700 billion. The bailout triggered public anger and calls for the government to break up the nation's biggest banks. It didn't. A decade later, the largest banks are even bigger than they were then. They've long since repaid their bailouts. JPMorgan Chase, Wells Fargo, Bank of America — all giants before the crisis — are still the nation's largest.

Politically, banks are once again exerting outsize influence in Washington, persuading the Republican-led Congress to begin easing the tighter regulations that were imposed on them after the crisis. And profits have never been higher. The Federal Deposit Insurance Corporation says the nation's banks earned $60.2 billion in the second quarter — an industry record.

The government now applies "stress tests" to the largest financial institutions. The idea is to assure the financial world that the banking system remains sound and that any crisis can be contained.

Under the tests, the government has generally found that the nation's 35 largest banks could withstand a plunging stock market, cratering home prices and surging unemployment. Not everyone sees the tests as rigorous enough. At a conference this month, Larry Summers, a Harvard University economist and former Treasury secretary, called them "comically absurd."

-- Ken Sweet.

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LESS HOMEOWNERSHIP, WEALTHIER HOMEOWNERS

When the financial crisis erupted, the Census Bureau reported that nearly 68 percent of Americans were homeowners. That figure sank as millions faced foreclosure, spiking unemployment left many without savings for a down payment and homebuilders scaled back construction.

Just 64 percent of Americans owned homes as of mid-2018.

The downturn sent U.S. home prices tumbling, but the Case-Shiller index of home prices began recovering in early 2012. Home values have been climbing at roughly double the pace of wage growth in recent years. The result is that many would-be buyers can't afford a home they would want and must instead rent.

In most areas — and without adjusting for inflation — home prices nationally are at or above what they were in 2008. The proportion of homeowners who owe more on their mortgage than their home is worth has returned to near-normal levels. And foreclosures are back to a more typical pre-crisis rate.

Those who survived the housing meltdown in good standing have prospered. Average 30-year mortgage rates plunged from roughly 6 percent to as low as 3.3 percent, according to mortgage buyer Freddie Mac. Some people used the lower rates to refinance their mortgages and save money. As a result, the Census said the median monthly cost for a homeowner was $1,491 in 2016 — roughly $170 less than in 2010.

Still, the recovery has been uneven. In such markets as Los Angeles, Dallas and Denver, home prices have eclipsed their pre-crisis highs the past decade. Others — Chicago, Baltimore and Phoenix, among them — remain well below their peak prices.

-- Josh Boak and Alex Veiga.

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SAFER MORTGAGE LENDING

Before the crisis, many lenders offered a bevy of risky loans that frequently cleared borrowers for financing even if they had no proof of income or no money for a down payment. Many such loans were interest-rate time bombs that let buyers pay little in the first few years of homeownership and that then smacked them with a hefty mortgage payment increase.

Banks had little incentive to ensure that borrowers had the means to afford payments. That's because the lenders promptly bundled and resold the home loans to Wall Street via what was then a vibrant, private secondary market for home loans.

Ten years later, it's a different story. The underwriting rules that banks must follow for their loans to be considered "qualified" to be bought by the government have been tightened.

-- Alex Veiga.

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THE RICH GOT RICHER

Income inequality has worsened over the past decade — an issue that has angered and frustrated voters who view the economy as being rigged against them. Much of the increased wealth gap reflected the nature of a recovery that depended on a stock market boom made possible, in part, by the Fed's slashing rates to near-zero to help pull the economy out of its tailspin.

Because wealthier Americans own the bulk of U.S. stocks, they reaped the benefits. They were also less likely to lose a house and more likely to keep a job. Research has found that they also spent more on education for their children. That helps set up another generation of income inequality because investments in schooling tend to lead to higher future incomes.

Last year, the top 5 percent of households earned an average income of $385,389, according to the Census Bureau. That is 6.26 times more than the average income of $61,564 for the middle 40 to 60 percent of households. Back in 2008, the top 5 percent made 5.88 times more than middle-income Americans.

This recovery is radically different from the aftermath of the Great Depression, the event that many economists consider to be comparable to the 2008 financial meltdown. The proportion of wealth controlled by the top 10 percent began to decline after 1932, a trend that stretched for decades until 1986. But after the Great Recession, the proportion of wealth held by the top 10 percent rose.

-- Josh Boak.

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STOCKS REBOUNDED

In the months after the crisis erupted, stock prices tumbled like so many dominoes. Government officials, bankers and economists warned of a contagion in which the crisis that originated with bad home loans would seep from Wall Street to publicly listed companies and small town businesses.

The financial shockwave struck Europe, Asia and practically everywhere else. The Fed did what it could to stabilize markets. It slashed its key short-term rate and bought government debt and mortgage-backed securities to force down longer-term loan rates.

The Dow Jones Industrial Average bottomed in early 2009 after having shed half its value. By early 2013, it had surpassed its previous high. And stocks kept climbing. Investors no longer worry as they once did that the financial system will implode. Yet despite the stock-price gains, there still isn't much widespread trust in the market.

Last year, even when the S&P 500 was riding a powerful upsurge, investors put $186 billion into stock funds, according to the Investment Company Institute. They showed less eagerness than in 2007, just before the Great Recession, when investors poured in $201 billion into stocks.

Stock holdings are still concentrated among the wealthiest Americans — even more than on the eve of the recession. Among families in the top 10 percent by income, 95 percent own stocks, according to the Fed.

The typical family in the top 10 percent by income had $363,400 in stock investment as of 2016. The typical middle-income family — between the 40th and 60th percentile — has only $15,000 in stock investments, down from $20,200 in 2007.

-- Stan Choe.

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SURGING STUDENT DEBT

Student debt has exploded — shooting up 131 percent in the past decade to $1.4 trillion, according to the New York Federal Reserve.

The 2008 financial crisis reshuffled the sources of consumer debt. Education loans supplanted the outsize role that credit cards and auto loans had previously played in household budgets. Though mortgage debt remains the dominant source of consumer debt, it's declined in the past decade from $10 trillion to $9.4 trillion.

After the recession, more Americans needed to borrow for college and graduate school. Families had less money to pay for their children's education. And many unemployed people went to school with the belief that a college degree would reward them more financial security. The average college-educated family owed $47,700 on education loans in 2016, up from an inflation-adjusted $36,300 in 2007, according to the Federal Reserve's survey of consumer finances.

The rush of student loans isn't all negative, of course. American workers emerged from the recession with more education and know-how. And a college degree has historically corresponded with lower unemployment. But heavy student debt tends to delay such critical financial milestones as marriage, home ownership and parenthood.

-- Josh Boak.

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REGULATORS ARE REVERSING THEIR CRACKDOWN

As the economy tanked, it became obvious that regulators had overlooked wildly reckless practices by banks, mortgage lenders and others that had triggered the recession. Critics argued that federal officials had even enabled the bad behavior.

In 2010, President Barack Obama and the Democratic majority in Congress approved a sweeping overhaul of financial rules. Their goal was to stop another meltdown so a failing bank could no longer sabotage an entire economy and stick taxpayers with the bill

The Dodd-Frank law empowered regulators to, among other things, close major banks without resorting to bailouts. Risky lending was curbed. Shadowy financial markets encountered new supervision. And a new agency, the Consumer Financial Protection Bureau, was authorized to protect consumers from abusive financial products. The CFPB took the lead in policing mortgages, credit cards, payday lending and, student loans, among other items.

But with the election of Donald Trump, many such rules are being unwound. Trump embraced the view of many Republicans and business groups that Dodd-Frank, with its stricter and costly new rules, had stifled economic growth. Congress has since eased many of the key restraints on banks.

In the meantime, enforcement actions by the CFPB have been curtailed. The leadership team Trump installed, among other things, weakened the CFPB office that focuses on discrimination in lending. And all the agency's operations have come under review for possible overhaul.

-- Marcy Gordon.

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A MORE FRUGAL CONSUMER

The financial crisis and the recession that followed left such a deep scar on those who lived through it that it forced Americans to take a truly radical step: Spend less.

Consumer spending fell during the Great Recession and has grown only slightly ever since. In the 30 years before the recession, consumer spending increased by an average of 3.4 percent annually. By contrast, in the first eight years after the recession, from 2010 through 2017, it's risen just 2.3 percent a year.

Americans are even saving a bit more. The savings rate averaged 7 percent in the first six months of 2018, up from a low of 2.5 percent in 2005 at the height of the housing boom. Many economists say the higher savings and lower spending growth show that the trauma of the financial crisis still haunts many consumers despite gains in wealth. This trend suggests that they regard housing and stock market wealth as more precarious than in the past.

-- Christopher Rugaber.