The Financial Crisis, 10 Years On

On Aug. 9, 2007, we witnessed the first tremor of a financial earthquake. Ailsa Chang talks with David Wessel of the Brookings Institution about the economy, 10 years later.

AILSA CHANG, HOST:

On August 9, 2007, 10 years ago, we saw the first signs of a financial disaster that would bring down some of the biggest banks, crush the housing market and send the economy into the worst downturn since the 1930s.

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UNIDENTIFIED REPORTER #1: The Dow tanked 387 points, its second-worst day of the year.

UNIDENTIFIED REPORTER #2: And that's what has the market so roiled. How many other problems are there out there that we don't know about?

UNIDENTIFIED REPORTER #1: I'm sure someone can...

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UNIDENTIFIED REPORTER #2: Bernanke needs to open the discount window. That's how bad things are out there.

CHANG: As the financial crisis unfolded, we often turned to David Wessel of The Wall Street Journal to help us make sense of what was going on. David's still a contributor to The Wall Street Journal, and now he's director of the Hutchins Center at the Brookings Institution. He joins us now to talk about how things look 10 years later. Hi, David.

DAVID WESSEL, BYLINE: Good morning.

CHANG: David, there were many tremors that led up to the financial earthquake. But what is so significant about the one on August 9, 2007?

WESSEL: On August 9, 2007, a French bank, BNP Paribas, surprised everyone. This bank had taken money from investors and invested that money in subprime mortgages. BNP Paribas told their investors, you cannot take your money out because we have no idea what a subprime mortgage is worth anymore.

This was the moment that the subprime housing crisis in the U.S. crossed over into the global banking system. I mean, think about it. Some bank in Paris is discovering that they have a whole lot of mortgages from Detroit or Las Vegas, and they're so bad, they can't even put a price on them.

CHANG: Many Americans would eventually suffer devastating financial losses. Have we made up this lost ground? Are we whole again?

WESSEL: You can never undo the damage that was done to millions of people. But if you step back and look at it, yes, the U.S. economy has finally recovered. Housing prices in general across the country have returned to the levels that they were at at 2006 when housing prices peaked, but that's not true everywhere. Chicago, Las Vegas, Arizona, Florida - their housing prices are still lower than they were. And I find this really shocking. Today nearly 1 in every 10 people with a mortgage owes more money to the bank than their house is worth.

CHANG: You mean they're still underwater.

WESSEL: They are still underwater 10 years after the start of the crisis. So what does it mean for those people? They can't refinance their mortgage to take advantage of lower interest rates. They probably can't move to get a job somewhere else. And they are less likely to buy cars or go out to the movies and stuff because they have this big burden, knowing that they have no equity in their homes.

CHANG: But more broadly speaking, what about banks? Banks are often called the arteries of the economy. Are they healthy now? Could they withstand another shock like the one we saw?

WESSEL: The banks are definitely stronger. They've been forced by the regulators and Congress and international financial regulatory institutions to build bigger capital cushions and to rely less on borrowed money. We force banks to run themselves more conservatively. They're not supposed to bet their own money alongside the customers'.

CHANG: But about those regulations you just mentioned, there's been a lot of criticism that those regulations put in place went too far, that they have strangled the economy, that they are preventing banks from lending freely. Do you agree with those criticisms?

WESSEL: It is certainly true that we created a patchwork of regulations. We didn't streamline the regulatory agencies. I think banks have a point when they say, we're getting shot at from every direction. But the evidence is that these new rules are not restraining credit across the economy. I don't think they are strangling the economy. We have told the banks, you can't do what you were doing before the crisis, and that has made the financial system less vulnerable and more resilient.

But Congress is now revisiting some of the rules. And the Trump-appointed regulators are doing the same. So I think there's a chance that things were put in place to reduce the chances of another financial crisis or deal with one when it occurs will be undone. And that could leave us vulnerable to another shock.

CHANG: That's David Wessel. He's director of the Hutchins Center at the Brookings Institution. Thanks so much for talking with us.

WESSEL: You're welcome.

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