There are lessons to be learned for the next rainy day

By CHRIS FARRELL

Last update: August 29, 2009 - 10:58 PM

The numbers suggest the recession that began in December 2007 is over or is coming to an end. Of course, with a 9.4 percent unemployment rate no one should get too carried away. The economy remains fragile, vulnerable to an unexpected setback. Still, the message in the past week's housing market, gross domestic product and world trade figures reinforce a growing optimism. The combination of extraordinary monetary policy actions, bank bailouts, and fiscal stimulus worked to prevent the economy from falling into another Great Depression. We're now on the mend.

Question is, could a similar debacle happen again? Sadly, the answer is yes. The trading and speculative side of the financial services business is still dominated by a bonus-obsessed, swing-for-the-fences culture. Regulators have yet to agree on how to re-regulate the industry, let alone figure out a way to ensure that no bank or financial institution is too big to fail.

Yet the risk of another finance-led catastrophe isn't over the next year or two. It's when the balance sheet pain subsides. Difficult questions like this involve what the 18th-century British conservative Edmund Burke termed "one of the finest problems in legislation, namely, to determine what the state ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion."

We can hope that over the next few years, Washington will have a blueprint to prevent financial institutions from privatizing profits during good times and socializing losses in bad.

I am more confident that individuals and households have learned from recent experience. Memories linger. The generation that lived through the Age of Inflation (1970s and early 1980s) figured out that it was smart to borrow as much as possible. You got to pay back lenders with depreciated dollars. The borrow-big mindset continued even after inflation was tamed. The generation that has lived through today's Great Recession knows all too well the financial dangers of owing too much. Too many people have lost their homes or spent weeks burning the midnight oil juggling debts to rush out and borrow again with abandon when the good times finally roll. Two years ago the personal savings rate hovered around 1 percent. It's now jumped to more than 4 percent. We're all talking about saving more and borrowing less.

The Great Recession vividly showed how vulnerable all of us are to a setback. Jobs and incomes are less secure than ever. And everyone feels the need to build up their own unemployment insurance plan.

Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to cfarrell@mpr.org.

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