Book Review of Paying the Price: Ending the Great Recession and Beginning a New American Century by Mark Zandi

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Genre: Business & Money
Author: Mark Zandi
Title: Paying the Price: Ending the Great Recession and Beginning a New American Century (Buy the Book)


The financial chaos of 2008 inflicted catastrophic damage: double-digit unemployment, crashing home and stock prices, federal budget deficits in the trillions, and a wider gap between the country’s haves and have-nots. Pessimists say the U.S. economy is collapsing.

In his book Paying the Price: Ending the Great Recession and Beginning a New American Century, author and Chief Economist for Moody’s Analytics Mark Zandi argues otherwise: providing a detailed analysis of the financial crisis, why policy makers responded the way they did, and how it has worked to get us back on track, so far. Indeed, we have experienced a painful episode, but the progress we have made gives us a reason for optimism.

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Zandi identifies four root causes that led to the financial crisis – overspending, over-lending, under- regulating, and underestimating. After the tech bubble burst, the Fed kept interest rates low for the subsequent decade, which led to a flurry of spending as consumers cashed in on their home equity and took their savings rates to near zero.

At the same time, a flood of investment capital came into the US due to trade surpluses in the emerging world, and needed to be invested somewhere. Types of lending previously thought too risky were made easy through securitization and even low quality borrowers were able to access funds with little in the way of collateral or investigation.

These new complex instruments were not adequately regulated, and credit agencies abdicated their responsibilities through a combination of incompetency and conflict of interest. Finally, Americans underestimated a number of things – the possibility of home prices falling, the wherewithal of the people and institutions in charge, and the likelihood of the return of wild business cycle swings after decades of calm.

Finally, in 2007, the instabilities of this system came to a head. Mortgage defaults and delinquencies began ticking up; Bear Stearns got into trouble and was sold; Fannie and Freddie Mac were taken over, and institutions like Lehman and AIG spiraled into failure.

Investors panicked, pulling their money out of the banks wherever possible, while the government dealt with failing institutions erratically and inconsistently. As the financial and credit systems froze, clearly something drastic needed to be done.

Zandi explores the actions taken to right the failures of the financial crisis, starting with the FDIC, which raised the cap on protected deposits and guaranteed vast sums of bank debt. Government intervention stepped up even further with the Troubled Asset Relief Program, which injected hundreds of billions into the financial system, propping up major institutions and quelling market panic. These funds were

tied to various stress tests, meant to ensure banks were taking steps to solidify their financial positions. In addition to these actions, the Fed flooded the economy with liquidity through various asset purchase programs, and Congress passed a massive stimulus bill; both of which were meant to kick start the struggling economy.

New economic regulation in the form of the Dodd-Frank Act also sought to patch some of the regulatory blind spots that came to light due to the crisis.

The financial crisis caused a lot of damage and required herculean efforts to get through, but also led to some remarkable positive progress. In the years since, Americans have dramatically reduced their debt levels; banks have improved their capital cushions, and businesses have become more profitable and productive, putting the economy in a strong position for the years ahead.

The policies that brought us out of the crisis were not anyone’s ideal prescription, but given the circumstances ultimately worked remarkably well. The economy is still not fully healed, and there are still issues to address, but America is in as good a position as ever to succeed in the years ahead.


The financial chaos of 2008 inflicted catastrophic damage: double-digit unemployment, crashing home and stock prices, federal budget deficits in the trillions, and a wider gap between the country’s haves and have-nots. Pessimists say the U.S. economy is collapsing.

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In his book Paying the Price: Ending the Great Recession and Beginning a New American Century, author and Chief Economist for Moody’s Analytics Mark Zandi argues otherwise: providing a detailed analysis of the financial crisis, why policy makers responded the way they did, and how it has worked to get us back on track, so far. Indeed, we have experienced a painful episode, but the progress we have made gives us a reason for optimism.


The U.S. financial system exists to connect savers with borrowers, a process requiring both skill and resources, yet if done correctly benefits the broader economy. The system has ups and downs, most of the time the pain being short lived and manageable. This was not the case in the late 2000s, the period commonly referred to as the Great Recession.

In the end, the economy escaped collapse, but only barely. How did we get ourselves into a situation that had the potential to inflict catastrophic damage in the United States and beyond? The answer is multifaceted, which called for unprecedented policy actions by the U.S. government.


Fearful of deflation after the technology bust in 2000, the Federal Reserve pushed interest rates to record lows. Alan Greenspan, chairman of the Federal Reserve, believed the housing market was going to jump-start the economy and diffuse the threat deflation posed.

A sharp cut in interest rates (from above 6% to 1%- a level not seen since the late 1950s) was to function as a shot of adrenaline for the housing market. As mortgages became cheaper, homeowners felt wealthier and acted as so, aggressively borrowing beyond their normal means and spending in excess.

Buyers were publicly encouraged to take out adjustable rate mortgages, suggesting they would be a better bargain in the long run.

Cash out refinancing in which homeowners borrowed more than the current mortgage balance was taking over. Nearly $800 billion dollars was pulled out of homeowner’s equity, some to purchase sensible investments such as college tuition, but the overwhelming majority to purchase new cars or expensive vacations.

The savings rate, the percentage of after tax income that consumers don’t spend, fell sharply from 10% to practically zero. With house prices surging and interest rates low, this seemed to make financial sense.


Trillions of dollars came rushing into the United States from emerging economy’s flush trade surpluses. U.S. based banks were now managing not only the savings of American households, but those in Brazil, China, India, and other growing economies.

U.S. consumers continued to dive for the lower-priced goods they offered, earning them billions of dollars per year in trade.

Global investors began to develop an appetite for higher returns as opposed to investing in strictly risk-free U.S. Treasuries. Cash was everywhere and all of these dollars needed to be invested. Wall Street came to an answer: securities backed by residential mortgages, credit cards, auto loans, and more.

This is a process known as securitization. Securitization involves combining many loans and using the principal and interest payments to back bonds which are then sold to investors. The benefit of this process is fairly straightforward; it allows for capital to flow where it is needed.

Borrowers could get cheaper loans because more institutions were providing them and investors had the opportunity to diversify their portfolios. Everyone seems to benefit; however, there is little incentive for the financial institutions originating these loans to ensure their quality, an inherent flaw in the system.

Securitization has existed for decades, historically limited to only the highest-quality borrowers. The logic supporting this was disregarded in the mid 2000s as trillions in residential mortgages were sold to global investors in structures that became increasingly obscure and complex.

The proceeds then flowed back into housing allowing for an even larger flood of new mortgages offered to even riskier borrowers. At the pinnacle of the lending frenzy in mid-2006, one-half of all new mortgages required only a cursory building appraisal, little or no down payment, and a narrow documentation of income and employment history.


The Fed believed that markets worked efficiently if left alone. If the market was allowed to police itself, investors would ensure that bonds they were buying were sound and priced appropriately. Loans to homeowners susceptible to default would carry higher interest rates, thus compensating investors for the added risk.

Few investors were equipped to successfully evaluate the risk level of these exceedingly complex debt instruments, placing an increased emphasis on the ratings these bonds were given by credit rating agencies. Wall Street needed ratings to sell any bonds, mortgage-backed securities in particular.

As information regarding homebuyer income, debt levels, and employment poured in, no effort was made by the agencies to verify it because it was not thought to be their responsibility. Since credit rating agencies are paid by the issuers of the bonds as opposed to the investors who buy them, there remains an incentive to produce favorable opinions in order to obtain the highest price for the securities.

Although little evidence of this exists, the appearance of a conflict of interest is at least present, and was potentially contributing factor to the inaccurate ratings these bonds were receiving.


Households bought into the idea that a home was a fantastic investment. Those who worried about a bubble were told repeatedly that U.S. house prices had not fallen all at once across the country since the Great Depression. Renting seemed to be for suckers, and as long as borrowing was cheap, lower- income households could keep up. Credit cards, auto-loans, and mortgages were easy to get despite a lag in income.

Securitization was supposedly guided by a mountain of laws, regulations, and accounting rules designed to prevent this type of bad lending, but the flood of investor dollars was stressing the system. Lenders, rating agencies, and investment banks believed their data and models were sophisticated enough to prevent colossal mistakes.

Investors concluded wild business cycle fluctuations were a thing of the past. Central bankers believed they could step in and limit any economic fallout before significant damage was done. Everyone thought someone else was watching. Little thought had been given to the impact a tsunami of foreclosures would have on the greater economy. There was too much money to track, and profits were too favorable to cause anyone to worry. This type of euphoria held the seeds of destruction.

“If it’s growing like a weed it probably is one.”


“It was difficult to determine precisely what was going on, let alone why it felt wrong.”

Trillions of dollars had been pumped out by debt backed by increasingly shaky mortgages. Excessive lending was fueling homebuilding and buying, pushing prices to levels that made single-family household near unaffordable for more and more families.

The market was dominated by speculators looking to flip homes for quick profits, thus increasing prices even more through the illusion of higher demand. The financial system had become so complex only that the most sophisticated investors could keep up.

The first clear fissure in the financial system appeared in early 2007, as mortgage lenders began reporting towering amounts of defaults and delinquencies.

Blue chip investment house Bear Stearns was a big player in the mortgage world. As the value of the mortgage securities they held began to plummet, their problems began to threaten the entire financial system. The spike in the LIBOR Rate (the rate large banks pay when they loan each other money) signaled financial angst, as banks were charging higher rates to their biggest peers in fears they would not be repaid.

No one was willing to lend Bear money, so they turned to the Fed. Instead of allowing the firm to collapse in a disorderly bankruptcy, the Fed arranged a sale of the firm to JPMorgan Chase by offering an attractive loan to seal the deal. The crisis was averted, but only briefly.

Worldwide financial panic ignited when government sponsored housing-finance behemoths Fannie Mae and Freddie Mac were taken over in September 2008. Due to securitization, private lenders could offer extra low rates and irresistible terms Fannie and Freddie simply could not match.

As private subprime and alt-A loans reached an outstanding $600 billion and conditions were worsening, private lenders pulled back. It was time for Fannie and Freddie to get back into the arena in order to keep the housing market from unraveling, or so regulators believed.

Regulators never required them to hold as much capital as private lenders because their loans historically went to only top-tier borrowers. As they increased loans despite the low creditworthiness of the borrowers, the capital they held was beyond inadequate to cushion in the event of major losses. Share prices for Fannie and Freddie plunged as investors began to fear they might fail.

Shareholders were effectively wiped out when Fannie and Freddie were firmly taken over by the federal government, shocking markets around the globe, leaving investors in all financial institutions to question the true value of their stocks, bonds, and loans.

A cascade of bank failures within days after the takeover took place.

If owning a stake in the two biggest financial institutions on the planet wasn’t safe, was anything? Investment house Lehman Brothers spiraled towards bankruptcy as shareholders dumped stock. Insurance giant AIG, having been aggressively writing insurance on mortgage-backed securities via the credit default swap market, was also in trouble.

As the value of the securities declined and the cost of insurance rose, credit rating agencies downgraded AIG debt. Investors demanded more collateral to cover the increased risk, collateral AIG could not raise.

Twenty-first century technology meant there was no need to stand in line. Money was fleeing the banks with a simple click of a mouse. Bear Sterns was folded into J.P. Morgan Chase via government help, shareholders in Fannie and Freddie were wiped out while bondholders made whole, and Lehman was allowed to go bankrupt, destroying its stakeholders.

The government was handling failing institutions erratically and inconsistently, causing creditors and depositors in financial institutions to have no slight idea where they stood. Rightfully so, they fled, causing credit from all corners of the financial system to freeze and threatening hiring, investment, and growth.



The Federal Deposit Insurance Corp. was the first government agency to act. The FDIC was created after the Great Depression to prevent bank runs by providing deposit insurance and guaranteeing the banks’ debt. The image of panicked depositors lined up demanding their cash was a faint memory of the past.

This changed in the financial crisis. FDIC’s seal was inadequate as the cap was limited to insuring deposits of only up to $100,000. Many wealthy households had deposits exceeding this limit. Given authority by Congress, the FDIC raised the deposit insurance limit to $250,000 and created the Term Liquidity Guarantee Program to guarantee that investors in bank debt would be repaid.

Approximately $350 million of bank debt was guaranteed, and wealthy depositors could divide up their cash among institutions in order to remain below the cap. There no longer remained the fear that bank investors’ and depositors’ money would be safe. Still, a bigger commitment was needed by government to restore the confidence lost, and they only had a few days to do so.


“Ben, I think we need $700 billion.” The room was silent as Treasury Secretary Henry Paulson whispered. “TARP had to be big, really big, to convince financial markets that the government was committed to preserving the system, only then would panic abate.”

The Troubled Asset Relief Program was devised by Paulson and President Bush at the height of the crisis as a way for panicked banks to obtain capital they could not get from private investors. Many legislators disputed the idea, arguing it was nothing more than a back-door handout to the banks, propping up the Wall Street institutions whose actions had led us to this state in the first place.

As the Dow Jones Industrial Average suffered its largest daily point loss of nearly 800 points, Congress was left with no choice, and TARP became law in a matter of weeks. Its mission was to purchase troubled mortgage loan securities whose value had shattered when homeowners stopped paying on their loans.

Since there was so little time to determine a process in which the Treasury would buy banks’ troubled assets, TARP funds were mostly used by the government to take equity stakes in the nation’s largest financial institutions through the Capital Repurchase Program. TARP capital did not come easily, however. It was expensive with many strings attached, but it was there if banks needed it.

Management and shareholders had strong incentives regain control of their companies and to buy back the government’s stake, and nearly all borrowers of TARP funds ultimately paid of their loans with interest. This approach was a way of allowing large financial institutions to remain private, and was instrumental in allowing a quick governmental exit from the banking business.

Policymakers went from allowing Lehman Brothers to fail, sending a clear signal the government would not rescue the system, to becoming a major shareholder in the nation’s financial system, going to theatrical measures to keep it along with the entire economy afloat.

The TARP will remain politically tarnished due to its association with the unwarranted bank bailout; however, it stabilized the economy by providing the cash that helped save General Motors and Chrysler, stemming the housing crash, and restoring lending to small businesses.

Stress Testing

Arguably the most important government response to the Great Recession was the bank stress tests. In order for the government to withdraw, the banks had to prove they had sufficient capital to survive.

The idea was to require the nation’s 19 largest financial institutions (those with assets exceeding $100 billion) to determine the amount of losses they would incur if the economy sank more than expected. They would then be required to raise enough capital to prevail against these loses, either through additional TARP funds or private investors.

Stress tests came under extreme scrutiny, being criticized as a way for banks to appear solid even if they weren’t; however, they were anything but for show.

Banks were required to assess for what would happen in the event unemployment rose above 10% in 2010 and if house prices fell an additional 30%. An astonishing 2-year cumulative loss rate above 9% was concluded, comparable to what banks lost during 1933 and 1934, the worst two years of the Great Depression.

A hefty $75 billion was needed to survive such a new depression. TARP funds assured banks that in the event they came out deficient, they were not doomed. It came at a high cost, but the giant pot of money banks were given access to made it possible for the testing to be successful.

Regulators then decided to make public each institution’s detailed test results to solidify the motive behind the testing. The potential loss rate of Citigroup’s commercial real-estate loans or American Express’ credit card portfolio could be accessed by anyone.

The transparent nature of the process convinced everyone that raising more capital was key. Interbank lending rates were quickly restored to what they were prior to the crisis. Stress testing has since become a standard component to U.S. banking regulation. Remarkably, banks are now as highly capitalized as they have ever been.

Monetary Accelerator- ZIRP, QE, and Operation Twist

Zandi concludes no one was better equipped to lead monetary policy making during the Great Recession than Fed Chairman Ben Bernanke. Bernanke’s education and studies on the Great Depression lead him to believe solid regulation was necessary to battle and prevent asset bubbles.

He began by lowering the federal funds rate target to the lowest rate in history, effectively zero. When the real funds rate (the difference between the funds rate and expected inflation) is negative, debtors can repay what they owe more easily, households are encouraged to spend more aggressively, and incentive for creditors and investors to take on more risk increases.

The Fed usually lowers the funds rate below the interest rate to jump start recovery. Inflation expectations were already near 2%, thus there was no other way to generate a negative real rate without bringing the federal funds rate effectively to zero. Recognizing that low inflation holds potential to give way to absolute deflation, this was an uncomfortable position for the central bank to be in.

In response to the threat of a deflationary trap, the Fed took the next logical step by implementing a process known as Quantitative Easing (QE), which arranged for the purchase of trillions of dollars in treasury bonds and mortgage securities to drive down long-term interest rates. Both were purchased on a large scale beginning in late 2008. By June 2009, the Fed held $2.1 trillion in these securities.

The Fed’s balance sheet continued to balloon until 2011 when they held nearly $3 trillion in Treasury and mortgage securities.

Critics argued this was essentially monetizing the nation’s debt and paving a way for hyperinflation by essentially printing money to pay for government obligations. Although skepticism was excessive, QE successfully provided a way to ward off the deflation the financial system was experiencing.

Long-term financing costs plunged downward, allowing multinationals to lock in funds for decades at nearly nothing. Investors were earning very low returns on Treasury bonds, thus the market for higher-risk securities which had been shunned during the panic were appearing more attractive. Financial markets were rallying at even a hint of more QE.

As deflation risks faded in 2011, the Fed decided against another round of QE and opted to trade $400 billion worth in short-term Treasuries for the same amount in long-term bonds in what was referred to as Operation Twist. Although limited by the Fed’s quantity of short-term securities, long-term rates were successfully pushed down even further without affecting the Fed’s balance sheet.

Despite the massive amount of liquidity the Fed created through its zero-interest rate policy, QE, and Operation Twist, they sent a clear signal to investors that those policies would quickly be reversed in the event inflation exceeded the 2% target.

Inflation expectations were explicit, making it easier to successfully hit this target.

Transparency empowers the Fed to quickly affect financial markets. By early 2012, the Fed was virtually an open book. Concerns of economic depression dwindled, inflation resided near the target, and recovery was approaching.

However, several hurdles were left to jump as gasoline prices were reaching record highs, Europe was in financial turmoil, and millions of homeowners still faced foreclosure. The Fed had successfully injected trillions of new money in order to jump-start the economy. They were on high alert and would continue to be until these threats weakened.

It was not until Bernanke was able to masterfully devise policy tools to unwind the aggressive actions taken was his plan deemed successful. Reverse repurchase agreements and term deposits were new financial instruments the Fed created.

They provided a way to drain bank reserves over time as needed. Many mock rounds of transactions were completed, and Zandi according to Zandi current policy makers are prepared to act at precisely the right time in the event runaway inflation is triggered.

Stimulus- It is Not a Dirty Word

Help from the Federal Reserve was nearly played out: the benchmark interest rate was near zero, and an unprecedented tactic called quantitative easing to bring down long term interest rates was already in place. In addition to the Fed’s efforts, Congress and the Obama Administration created a massive response to the Great Recession in the form of a fiscal stimulus known as the American Recovery and Reinvestment Act, or simply called the Recovery Act.

Between 2008 and 2012, $1.4 trillion (almost 10% of GDP) had been enacted in the form of tax cuts and spending increases in order to stimulate the economy.

Tax cuts served as a quick relief for lower and middle-income households. They received rebate checks, had higher after-tax income, and benefitted from the credits being offered by purchasing homes and appliances.

Because some of the money the rebates provided was either saved or was used to repay existing debt rather than to fuel new spending, the tax cuts didn’t provide as much benefit as did the increase in government spending. The impact of the rebates was also diluted by the large pullback in spending by higher-income households, but they did provide households relief.

The fiscal stimulus included an array of government spending initiatives, the largest being the extension of unemployment insurance benefits beyond the standard 26 weeks generally provided. During the peak of the recession, over half of all unemployed were still out of work upon expiration of their benefits.

Aside from being a response to basic human need, the logic of Emergency UI was to prompt overall spending and activity, considering most of the benefits would be spent immediately. Many were concerned that the benefits would lead to free loading recipients would delay the search for employment preferring to instead collect the benefits. Statistical evidence exists suggesting the unemployment rate was approximately half a percentage point higher than it would have been without UI.

The author argues that although there were abuses, the large majority needed the benefits. This was clearly illustrated by the ratio of unemployed workers per job opening increasing to 6 to 1 and remaining above the normal 1 to 1 well into the recovery.

Infrastructure spending could be considered the most controversial aspect of the stimulus plan.

The projects ranged from roads and bridges to electrical power grids and medical records. These projects typically take a generous amount of time, and the boost in jobs and activity was needed soon. Worries of unproductive financing began to set in as many projects were delayed.

Critics were arguing some projects lacked legitimacy as airport renovation in thinly populated Pennsylvania and aquatic farming expansions in Minnesota began to pop up. Zandi concludes despite these instances, the infrastructure money ultimately proved helpful and welcome at the time by providing a significant boost to America’s depressed manufacturing and construction industries.

Zandi defends the commonly debated concept of the multiplier, which claims the economy gains the value of additional spending initiatives and tax cuts and in turn produces more consumer spending and business investment, thus multiplying their effectiveness.

Zandi does mention there remains much difficulty disentangling the data on government purchases to prove the effects are generated directly from policy actions or as a result from other economic forces. Based on the estimates of the multiplier analysis conducted by economist’s various statistical techniques, it is believed the .4 percent growth in real GDP in 2009 was a direct result of the stimulus package.

Zandi notes “In order to conclusively prove the fiscal stimulus worked would require a time machine; we would need to effectively rerun history without the stimulus to see if things turned out as well.” Although proof did not come neatly packaged in ways that resonated with the public, circumstantial evidence is strong.

The Recovery Act was passed in February 2009. The Great Recession ended officially in June and job growth resumed one year later. According to the Congressional Budget Office, if there had been no Recovery Act, there would have been between 1.3 and 2.8 million fewer jobs by the first quarter of 2010 when job growth took off.

Statistical analysis is subject to a range of uncertainties, but based on Zandi’s research and the research of others, the Great Recession would have been much longer, and the costs to taxpayers much greater without a stimulus plan.

The withdraw has been tricky, as fiscal policy became a drag in 2011 and an even bigger drag in 2012. There is still more work to be done to make the federal budget sustainable. Zandi argues this takes time, and concludes that although Washington may be politically dysfunctional, they managed to get it roughly right and will continue to do so.


In response to the regulatory confusion surrounding the Great Recession, an admirable legislation reform known as Dodd-Frank was passed. It aimed to establish a well-defined roadmap for our financial system. Dodd-Frank made significant changes, the most notable are as follows:

  • Established the Consumer Financial Protection Bureau, a regulatory agency to ensure the products and services that banks, brokerages, and insurance companies sold were suitable for American consumers
  • Established the Financial Stability Oversight Council to be the supreme regulator. Made up of a panel that included the Treasury Secretary the and the heads of both the Federal Reserve Board and the FDIC, they were to identify “systemically important financial institutions” or SIFIs, and hold them to higher capital and liquidity standards due to the risk they pose to the system.
  • Defined the resolution procedure for failing SIFIs, giving resolution authority to the FDIC.
  • Increased regulation on the shadow banking system by requiring firms register with the SEC, disclose their operations, and trade on open exchanges.

This was a massive undertaking, and considerable political and economic costs came along with its implementation. Critics argue the legislation is over-reaching and creates more problems than it solves. Institutions were fearful the CPFB would stifle the creation of new products and overwhelm compliance costs. Institutions lobbied intensely to not be labeled SIFIs because the regulatory costs seemed to exceed the benefits.

Zandi notes “even a perfect regulatory structure would have been unable to stop the global flood of cash that poured into the U.S. in the 2000s, fueling the lending boom that created the crisis.”

It is unlikely a pre-crisis FSOC would have done much to require financial institutions to raise more capital and reduce leverage, yet had Dodd-Frank been in place, securitization might not have become so lethal. Everyone from investment banks to credit rating agencies would have had more accurate information.

Risk taking in the derivatives market might not have grown had greater disclosure required. Households might not have borrowed so aggressively if they fully understood the loans they were taking on. As noted by Federal Reserve surveys, a large majority of subprime borrowers were unaware their payments were likely to balloon less than 2 years after they signed the loan.

Most importantly, an orderly resolution of troubled institutions would have been in place, establishing clear authority and maintaining the confidence of creditors. Zandi acknowledges the many moving parts of Dodd-Frank may not work exactly as intended all the time, yet comprehensive regulation is essential in order for trust to be restored on a global level.


Financial crises are ultimately debilitating because they choke off credit, what Zandi refers to as “the lifeblood of economic activity”. Commerce is put to a halt when households can’t buy homes, businesses can’t invest or trade, and governments can’t finance themselves. Recovery is slow because a substantial amount of time is necessary for overloaded borrowers to reduce their debts, or deleverage.

Economists feared it would take years for the economy to work through all the problem loans (totaling over $2.6 trillion) and for banks, households, businesses, and even the government to deleverage; however, we managed to do this in record time. Shown below are a few points illustrating the progress we have made:

  • Between early 2009 and summer 2012, households cut up nearly 100 million credit cards.
  • There was a significant reduction of car and home loans, and exceptionally low interest rates allowed households to refinance or pay off higher cost loans, freeing up cash that had been going to debt payments. Household debt service fell back to a level not seen in 30 years.
  • Troubled loans near foreclosure were shrinking, and if this last section of foreclosed property could be dealt with without undermining the housing market, the credit future looked encouraging.
  • Banks’ capital cushions were as large as they had been since the 1930s and profits were improving as write-offs abated.

There was a significant rise in business productivity; profits were rising above their prerecession peaks creating a record amount of cash and extraordinary liquidity.

Although these are significant accomplishments attributable primarily to policy responses enacted, this was panning out to be the weakest economic recovery in the history of the U.S. GDP was growing but only slowly, and unemployment was still above 8% in Summer 2012.

Businesses cannot not seem to shake the nightmares the Great Recession created. The question has shifted from whether companies can invest and hire more aggressively to how willing they are to do so. Zandi writes, “In most times sentiment reflects economic conditions, it doesn’t drive them. But at key junctures in the business cycle, the causality reverses; how consumers investors and managers feel drives the economy.”

Zandi encourages us to steer away from this gloomy view. Indeed, fixing our economy will require some reasonably good choices by the Federal Reserve, Congress, and the President, but policymakers managed to do what was necessary during the Great Recession and they are likely to do so again. Only when confidence is restored can our system be nursed back to health.


It began as an ordinary financial hiccup, and ended with a final bill costing the government $1.8 trillion. Zandi argues the stampede halted only after it became clear the government would backstop the financial system. The cost was monstrous, yet the bill would have been much higher to step aside and let the chaos sort itself out.

The weaker economy would have further undermined tax revenues and prompted even more government spending through automatic stabilizers, existing programs that expand on their own whenever the economy stumbles, such as unemployment insurance, food stamps, and welfare.

The policy mix was not anyone’s ideal prescription, and any one aspect of the government’s actions to quell the chaos can be justifiably criticized. However, given the speed in which policymakers acted while under extreme economic threats, they performed remarkably well.

Much more work needs to be done to make our federal budget sustainable, and a mortgage finance reform needs to take place, but ultimately we as Americans must retain our resilience and ingenuity in order to put our financial system back on path to becoming the envy of the world. would like to thank the Titans of Investing for allowing us to publish this content. Titans is a student organization founded by Britt Harris. Learn more about the organization and the man behind it by clicking either of these links.

Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.

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