On October 9th, 2007, the Dow Jones Industrial Average and the S&P 500 both closed at new all time highs. By late January 2008, both had lost more than 10% of their value and investors worried about a developing bear market. In the intervening three months the outlook the U.S. economy went positive to negative. In November and December 2007, the auction rate securities market, used by tax exempt borrowers such as hospitals, collapsed with no bids; on Dec 12th, the Fed announced the creation of by the Term Auction Facility which allowed banks to borrow anonymously for 28 days using a wide range of collateral to meet their pressing liquidity needs and stave off possible bank runs; in March, 2008, the Fed orchestrated the acquisition for Bear Sterns by J.P. Morgan Chase for $10/share, down more than 90% from the previous year’s high (Bear was the only major investment bank that refused Fed pressure to assist in the bailout of Long Term Capital Management in the 1990s); and, in that same month the U.S. Congress agreed to a “stimulus package” of $150 billion. At the same time the rest of the world began to realize that the 2007 ¬ 2008 financial crisis was not restricted to the U.S. So much for the stock market as a leading economic indicator, a status it achieved under Alan Greenspan’s tenure at the Federal Reserve.
What happened? And why? And what should progressives be saying and proposing in response to what is now widely acknowledged as an economic downturn of potentially major significance? This article argues (i) that the economic problems the U.S. now faces are long term and not readily amenable to the usual policy fixes; (ii) that the crisis is rooted in a convergence of three trends, two long-term and one more immediate; and (iii) that there are important policy ideas that progressives should be proposing, although their adoption will occur only as the result of political struggle and pressure.