U.S. Still on the Mend, 5 Years after Lehman Collapse

It is an anniversary without celebration: five years after the implosion of banking giant Lehman Brothers sparked the worst crisis in generations, the U.S. can say it avoided catastrophe.

After just barely pulling back from the precipice, industry is picking up, home prices are gaining, banks are stable and American consumers have started spending -- albeit still with great caution.

But the millions still jobless, and an economy still needing stimulus, shows the scars have yet to heal.

"I wouldn't say we're anywhere near having a fantastic situation again," says Harvard economics professor Kenneth Rogoff.

"But at least the economy has stabilized and is now moderately robust."

The economy was already struggling under the housing market collapse when on September 15, 2008, Lehman crumbled and the government's decision not to save it sent a shock down Wall Street.

The fall of the century-old U.S. investment banking stalwart detonated an implosion in the U.S. financial sector that reverberated around the globe.

The government quickly mobilized more than $420 billion to prop up other banks and automakers General Motors and Chrysler, whose collapse would have meant hundreds of thousands more jobs lost.

But that was not enough to contain the hemorrhage.

In the 12 months from September 2008, unemployment rocketed from 6.1 percent to 9.8 percent. The economy melted down, contracting at an 8.3 percent annual rate in the final quarter of 2008.

With receipts sinking and intervention costs rising, the government deficit soared to $1.4 trillion, from 3.2 percent of gross domestic product to 10.1 percent by 2009.

"It was a very risky period, we could have had a new Great Depression," said Rogoff.

Five years later, that nightmare has passed. With the exception of a mild relapse in early 2011, the economy has been growing steadily, if slowly, since the autumn of 2009.

-- Government intervention: decisive, but not enough --

"The ability of the U.S. authorities to take an aggressive approach to resolve the financial crisis was decisive," said Nicolas Veron, a researcher at the Peterson Institute for International Economics in Washington.

It was crucial to shore up faith in the banks.

After helping them with financial support, the government forced the banks to prove their strength via "stress tests" applied to their capital foundations.

That was done first in 2009, and was then cemented as an annual exercise in the Dodd-Frank legislation laying down fresh regulation for the financial system to avoid a repeat of the meltdown.

In February 2009 the new administration of President Barack Obama marshaled $787 billion to boost consumption and shore up the decimated housing industry.

The results? Home prices have certainly bounced back, and the administration says millions of families avoided losing their homes to foreclosures.

But home prices remain well below the pre-recession peak and millions more families still struggle to make payments.

Consumer spending, the fundamental motor of the U.S. economy, is also still below its peak, partly because household wealth -- including what people put away for retirement -- has dramatically fallen.

"Consumers have had a wake-up call in terms of their retirement savings, and they can't really lead a stronger recovery right now because they have to save more," said Joseph Gagnon, a former U.S. Treasury official.

And the jobs market and incomes remain weak. The unemployment rate, which peaked at 10 percent, is still 7.3 percent, and that does not count the number of Americans who have dropped out of the search for employment altogether, bringing the labor participation rate to a 35-year low.

For Nobel Prize-winning economist Paul Krugman, the efforts to revive the economy have been "an astonishing, horrifying failure."

Had the government spent three times as much for stimulus, he wrote in his New York Times column, "We would be a richer nation, with a brighter future -- not a nation where millions of discouraged Americans have probably dropped permanently out of the labor force."

Doing so though would have piled more on the national debt. As it is, the money the Obama administration spent increased debt by more than 65 percent in five years, to some $16.7 trillion.

Five years later, too, the economy remains dependent on the Federal Reserve's unconventional efforts to pump cheap dollars into it -- around $3 trillion since the onset of the crisis.

But firming growth means that could soon be halted. Many expect the Fed to announce next week the winding down of its stimulus -- the beginning of the end of crisis operations.

"We cannot declare a return to normal until we exit the Fed's exceptional measures," said Veron.