In the fall of 2008, with the presidential election campaign in full swing, the Bush administration seemed unable to come up with a response to the crisis. In keeping with the free market ethos, it allowed Lehman Brothers to fail. But this immediately created a domino effect, with the stock prices of other banks and investment houses collapsing, and the administration quickly reversed course. It persuaded a reluctant Congress to appropriate $700 billion dollars to bail out other floundering firms. Insurance companies like AIG, banks like Citigroup and Bank of America, and giant financial companies like the Federal Home Loan Mortgage Corporation (popularly known as Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), which insured most mortgages in the country, were deemed “too big to fail”—that is, they were so interconnected with other institutions that their collapse would drive the economy into a full-fledged depression. Through the federal bailout, taxpayers in effect took temporary ownership of these companies, absorbing the massive losses created by their previous malfeasance. Most of this money was distributed with no requirements as to its use. Few of the rescued firms used the public funds to assist home owners threatened with foreclosure; indeed, since they pocketed lucrative fees from those who could not pay their mortgages, they had no incentive to help them keep their homes or sell them. Giant banks and investment houses that received public money redirected some of it to enormous bonuses to top employees. But despite the bailout, the health of the banking system remained fragile. Firms still had balance sheets weighed down with “toxic assets”—billions and billions of dollars in worthless loans.

The crisis also revealed the limits of the American “safety net” compared with other industrialized countries. In western Europe, workers who lose their jobs typically receive many months of unemployment insurance amounting to a significant percentage of their lost wages. In the United States, only one-third of out-of-work persons even qualify for unemployment insurance, and it runs out after a few months. The abolition of “welfare” (the national obligation to assist the neediest Americans) during the Clinton administration left the American safety net a patchwork of a few national programs like food stamps, supplemented by locally administered aid. The poor were dependent on aid from the states, which found their budgets collapsing as revenues from property and sales taxes dried up. California, which in 2009 faced a budget gap of $26 billion, was forced to slash spending for education, health care, and services for the poor. In the United States as a whole, only one-fifth of poor children and their parents received any public relief at all.

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