The financial crisis of 2008: Why remember?

The financial crisis of 2008: Why remember?
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Ten years ago this weekend, the U.S. economy stared into the abyss: Bear Stearns had failed and been acquired; Fannie and Freddie had been taken over by the federal government; Lehman was about to file for the biggest corporate crack-up in history, and various other financial and industrial firms begged for government support in coming weeks.  

In the words of President George W. Bush, “Wall Street got drunk, and we got the hangover.” It has been a costly, angry and divisive decade since then. The human impulse is to treat it like a bad illness or nasty divorce: get past it and move on. Why should we pause this weekend and reflect on the financial crisis of 2008? My reply is that the crisis was a teachable moment upon which our collective wisdom depends.

Memories are short. These days, professors encounter the glaze of unfamiliarity that descends when referring to the financial crisis of 2008. Today’s students were in high school or middle school. Even adults display a desire to dodge the late unpleasantness. But collective memory is the bedrock of wisdom. Such wisdom begins from a recognition of at least three attributes of crises:
  • Great damage. Crises spawn high unemployment and bankruptcies, social instability (street riots and strikes), regime changes and geopolitical tensions. The cumulative output gap in the United States following the financial crisis of 2008 amounted to between $6 trillion and $14 trillion. From peak to trough in 2008, 8.8 million jobs were lost and $19.2 trillion in household wealth evaporated.
  • Recurrence. The research of Carmen Reinhart and Kenneth Rogoff documented the fact that from 1800 to 2012, almost no year was free of financial crises somewhere in the world. No experts believe that we have now eliminated the threat of future financial crises — they are a fact of life. Familiarity with the causes, consequences and mitigants of financial crises would be valuable preparation for future leaders in business, government and the professions.
  • Complexity. Financial crises qualify as “wicked problems” that have no simple causes or straightforward solutions, much like poverty, climate change and armed conflict. The 20-ish financial crises in U.S. history are largely idiosyncratic, each with its own lessons. There are no “silver bullet” preventives. Yet their complexity should not deter us from drawing important lessons. To do so, one needs patience and determination.

To understand crises is to know capitalism better. Karl Marx and others have pointed to the recurrent financial crises in capitalist economies as proof of the terminal illness of the capitalist system. Like predicting the apocalypse, Marxists argue that the end is nigh with each new crisis.  Maybe one day they’ll be right: the memoirs and histories of 2008 reveal that we came closer to total economic meltdown than before. On the other hand, political economist Joseph Schumpeter and others averred that periodic slumps and crises were necessary cleansers of inefficiencies. Schumpeter called capitalism a “gale of competition.” Financial crises expose the worst (and sometimes the best) in markets, institutions, instruments, leaders and entrepreneurs.  

To understand crises is to know ourselves better. The economist Michel de Vroey wrote, “To know who we are, we need to know where we come from.” Reflecting on 2008 helps to shape our sense of collective identity. The Great Depression was the major economic event of the 20th century that profoundly shaped the cultural narrative for some 80 years. All financial crises have long tails; 2008 will be no different.

Calling this a 10-year “anniversary” makes it seem like we should be celebrating the abyss.  Instead, let’s just call it a “retrospective,” a time for sober reflection to ask what we have and haven’t learned in the intervening decade. Walter Wriston, former CEO of Citibank, famously said, “Good judgment comes from experience; and experience comes from bad judgment.” Remembering the bad judgments that underpinned the financial crisis of 2008 is profoundly important for future wisdom.

Robert F. Bruner is a senior fellow at the Miller Center of Public Affairs, university professor at the University of Virginia, distinguished professor of business administration, and dean emeritus of the Darden Graduate Business School. He has held visiting appointments at Harvard and Columbia universities in the United States, and at INSEAD in France and IESE in Spain. He is the author, co-author or editor of more than 20 books on finance, management and teaching.