September 15th marks the 10-year anniversary of the collapse of Lehman Brothers and the beginning of what is now known as the Great Recession. The failure of Lehman Brothers led to the Dow falling by 540 points and losses of USD 700 Billion in investment funds. I.M.F. reports have estimated that banks and financial institutions suffered total losses of USD 4.05 Trillion, with 66% of those losses originated from assets and loans from the United States. It was the reluctance of Bank of America to rescue Lehman Brothers without support from the U.S. government; as well as Barclays not being permitted by the British government to purchase Lehman that sealed the fate of the 158-year-old Wall Street bank.
In a nutshell, the crisis was created by the subprime mortgage market in the United State through excessive risk-taking by banks such as Lehman Brothers. Through the process of securitization, many mortgages were bundled together and formed into new financial instruments called mortgage-backed securities. Many of the subprime loans were bundled and sold, as low-interest rates encouraged mortgage lending. As the accumulation and subsequent high default rate of these subprime mortgages mounted, the price of these securities plummeted, causes massive losses for firms which had invested heavily in, what was seen at the time, as a safe investment.
A decade later, corporations are reporting at record highs earning, the unemployment rate at 3.9% is at an 18-year low, and the Dow has nearly quadrupled since the Great Recession. U.S. consumers debt ratio has fallen from 99% to 80% of GDP from the start of the crisis. Serious delinquency rates are down from a high of 4.9% of mortgages in 2010 to 1.67%. Credit card delinquencies are down to 4.37%.
Having said that, it is the growing U.S. federal government debt of USD 21.48 Trillion that could lead to the next crisis. In the short run, Americans benefit from the deficit spending because it drives fiscal policy to lead economic growth as the Fed pays for defense equipment, healthcare, and building construction. However, in the long run, the debt is estimated by the CBO to reduce the real income for a 4-person family by as much as USD 16,000, on average, in 2047.