Happy birthday, economic meltdown!  (Original title changed to make sure nobody actually thought I was genuinely enthusiastic about the economic crisis…)

Yesterday marked three years since Lehman Brothers filed for bankruptcy – the high-water mark of the financial crisis. Over the next six months, the stock market declined by nearly 40 percent and the economy lost 4.2 million jobs – a pace of job-loss not seen since (at least) the Great Depression.

This episode has firmly tied together the financial crisis and the jobs-crisis in most Americans’ mind. But we should actually be a little more careful about doing this. The economy had already been in recession for eight-and-a-half months before Lehman’s bankruptcy (having shed 1.2 million jobs in seven straight months of losses) and had already swallowed one stimulus package (the Economic Stimulus Act, passed in Feb. 2008 and signed into law by President George W. Bush) with just a small hiccup before continuing its way down. The unwinding of investment bank Bear Sterns (not to mention hundreds of smaller commercial banks) had been done in a more “orderly” manner six months before (it was sold to J.P. Morgan in March 2008) but job losses just accelerated after this. So maybe the subsequent economic damage wasn’t all about Lehman?

In fact, both Wall Street’s meltdown and the American jobs crisis are casualties of the bursting of the housing bubble. The 35 percent decline in home prices between the beginning of 2006 and 2009 damaged banks’ holdings of mortgage-backed securities, which famously caused so much havoc on Wall Street.

But the economic damage inflicted by the bubble’s burst spread far beyond banks’ balance sheets. These same home price declines erased about $8 trillion in household wealth and consumer spending collapsed by over $400 billion as a result. The glut of unsold homes (who wants to buy an asset that is diving in value?) led to another $400 billion contraction in the residential building sector. Basically, these two effects, combined with the collateral damage they caused (state and local government cutbacks as tax revenues plunged and a pullback of other business investment as firms saw sales dry up) meant that the economy was staring (at least) a $1 trillion hole in overall demand for goods and services square in the face. And this hole, along with policy responses that were insufficient, can easily explain the depth of the recession we had without any reference at all to what was happening in the financial markets on Wall Street.

So was the Lehman blow-up and associated panic all just a side-show to the issue of jobs? That’s probably too strong. There’s serious economic literature arguing that financial market seize-ups can have significant effects on the non-financial economy. So maybe instead of the $1 trillion hole that we ended up, with the economy would have had a $2 trillion hole had policymakers allowed financial markets to completely shutter (hence shutting down credit even for still-viable businesses and households).

Maybe. However, we know the story of how policymakers reacted to the financial market distress: with near unlimited willingness to put public funds on the line and great deference to incumbent players. And, this mostly worked – there is little evidence that financial markets are actually providing a great impediment to U.S. recovery (this is not to say that an alternative set of policies to alleviate financial market distress couldn’t have also worked – and with less danger that by coddling incumbent players that we’ve just reassured them that no matter how poorly or riskily they do their jobs they’ll be bailed out again).

So how did policymakers react to the crisis left over after the ambitious financial market response – that $1 trillion hole in the economy caused by the purely non-financial sector fallout of the housing bubble? With measures that were clearly seen as insufficient in real-time. Wouldn’t it have been nice if policymakers had been as assertive in making sure that the job-market was healthy as they were in making sure that financial markets were healthy? If one was cynical you might think that the economic struggles of rich bankers are more important to policymakers than the struggles of ordinary workers.