The Crisis Last Time

AP Photo/Seth Wenig, File

Traders work on the floor of the New York Mercantile Exchange as Lehman Brothers announces its bankruptcy on September 15, 2008. 

A Crisis Wasted: Barack Obama's Defining Decisions
By Reed Hundt
Rosetta Books

Firefighting: The Financial Crisis and Its Lessons
By Ben S. Bernanke, Timothy F. Geithner, & Henry M. Paulson Jr. 
Penguin Books

This article appears in the Spring 2019 issue of The American Prospect magazine. Subscribe here

Every Democrat who aspires to win the presidency in 2020 (or ever) should already be asking the question: How do we avoid what happened to Barack Obama and his ideas in the fall of 2008?

Obama was, of course, the progressive candidate. He built a lane to the left of Hillary Clinton in the course of 2007 and then expanded it into a broad highway along which he could coast to victory in November 2008. The hope and change he promised was in no way about continuity with the past. Yet what President Obama delivered, over two administrations, was profoundly disappointing—and directly contributed to the rise of dangerous and despotic Donald.

The trite riposte is that Obama was overtaken by events. In mid-September 2008, Lehman Brothers went bankrupt. Lehman was a significant trader of and investor in mortgage-backed securities, with total liabilities of around $600 billion. The knock-on effect of this failure was much larger than expected by officials, quickly threatening to bring down a very large insurance company (AIG), other investment banks (Goldman Sachs, Morgan Stanley, and Merrill Lynch), and even the largest bank in the country (Citigroup), which had total debts close to $2.5 trillion.

It was not immediately obvious that the crisis would derail the Obama agenda. Initially, in fact, Obama seemed calmer and more likely to respond effectively to the disaster than his Republican opponent, John McCain. As Reed Hundt points out in A Crisis Wasted: Barack Obama’s Defining Decisions, a meticulous blow-by-blow reconstruction of Obama’s transition to power, for a brief moment everything seemed possible—including perhaps reforms as profound as the New Deal. Here was a newly elected leader who could produce, no matter how difficult the moment, a just and equitable set of solutions.

Instead, what the country got was Republicans in charge, literally. The three main decision-makers of the moment, Ben Bernanke, Tim Geithner, and Hank Paulson, have a new, jointly written book, Firefighting: The Financial Crisis and Its Lessons. Their slim volume is a further attempt to explain and defend what they did. Combine this volume with their three individual memoirs, and it starts to feel like they doth protest a bit too much in unison.

Bernanke is a Republican who was nominated to the Board of Governors of the Federal Reserve by George W. Bush—before becoming the chair of Bush’s Council of Economic Advisers and then chairman of the Fed. Paulson led Goldman Sachs until being brought in by Bush as Treasury Secretary. Geithner had a more bipartisan career—rising to prominence in the Clinton Treasury, becoming a senior official at the International Monetary Fund, moving to lead the Federal Reserve Bank of New York under the auspices of influential Wall Street Republicans and Democrats, and then hired by Obama to be his first Treasury Secretary. Geithner is a political independent (and former Republican); Bernanke and Paulson are long-standing Republicans.

“Personnel is policy” is a Washington cliché that also happens to be true. Let me venture a corollary: If you hire Republicans, you will get Republican policy.

Of course, there are several kinds of Republicans in the modern era, measured in terms of what they really believe. And it is becoming harder to know what some of them believe. Irrespective of their previously expressed views or votes, most congressional Republicans will turn their backs on anything reasonable if proposed by a Democratic president—and support even the most outrageous expedient if supported by Donald Trump.

However, Bernanke, Geithner, and Paulson are genuine Status Quo Republicans, and this is quite evident in their book. In their view, the world was basically fine before 2007. A modest fire broke out in that year and, despite their best efforts, became an inferno. When fighting a fire, surely, there is no time to argue about redecorating the living room. The fire was extinguished, the world was saved, and they continue to be surprised that we are not all more grateful.

Everything in this interpretation of events—and in their view of history—hinges on the metaphor of fire, chaotic and uncontrolled. No doubt the authors feel they are reaching out to people by popularizing economics; there are no tables or figures in their book, and very few numbers. But the metaphor is a smoke screen. This was not any kind of fire. Extreme financial deregulation allowed blue-chip financial-sector executives to make large bets backed by very thin amounts of equity. The bets went bad, and potential cumulative losses at their banks threatened dire consequences for the economy.

Status Quo Republicans have a simple preference in this situation: use all available central-bank and government resources to cover those losses fully and with no repercussions for those responsible. The accurate name for this approach is Lemon Socialism, meaning in this case: financial sector executives get the upside when things go well; you (the taxpayer, the unemployed, and the dispossessed) own the lemons when the economy turns down.

Bernanke-Geithner-Paulson did not invent Lemon Socialism. They did perhaps take it to a new level. The U.S., contrary to what is (sometimes) claimed by Expedient Republicans, has a strong national balance sheet and a highly credible central bank—so massive amounts of government support could be deployed. As a result, highly compensated bank executives generally did very well from the boom-bust cycle. Investors who had cash in hand were even better placed to snap up distressed assets and experience steep capital appreciation. They (not you) got the upside—and then the Trump tax cuts let them keep more (or perhaps almost all) of those gains.

This is the real reason that Donald Trump’s Treasury Department is currently working hard to undermine financial regulation. It is not at all because they have forgotten what happened and why. The explanation is much simpler: Top current officials made good money in the crisis. If you know how to play the game, the roller coaster of modern finance works just fine. As Trump himself said in 2006, when asked about the prospect of a major fall in house prices, “I sort of hope that happens because then people like me would go in and buy.”


THIS BRINGS US BACK to Reed Hundt, who is asking the important questions. Was there an alternative way forward in the fall of 2008? Why was that not followed? After all, there were plenty of actual Democrats in the White House, including Christy Romer at the Council of Economic Advisers, Larry Summers at the National Economic Council, and Peter Orszag at the Office of Management and Budget.

Reed Hundt was chairman of the Federal Communications Commission (FCC) under President Clinton, and he had a ringside seat for the meteoric political rise of Barack Obama. As a member of the Obama transition team in 2008, Hundt had access to everyone and apparently remains on good terms with the leading players. He argues persuasively that the major Obama-era decisions were all taken in late 2008 and the very beginning of 2009.

Hundt’s book is based on interviews and it sometimes reads like a loose synthesis of oral histories or even depositions. But this is actually refreshing. The articulate protagonists approved the quotes that he uses.

Hundt feels that the underlying political beliefs of Clinton-era officials were part of the problem. He uses the term “neoliberal” rather frequently and not always with great precision, but his general instinct is right. Top officials from the Clinton era retained a greater preference for less regulation and a generally smaller role for government than, for example, Hundt would prefer. Their style of economic governance from the 1990s was to score singles and steal bases, not swing for the fences.

Hundt is right that more could have been done, but it is hard to design a dramatically new policy once you are in office—the press of events tends to dominate, even when there is not a confusing, fast-evolving international crisis. Obama did not bring with him a large, experienced team, and during the campaign he developed only broad-brush ideas. The experts on the details were almost all people who had worked with the Clintons. They were Small Ball Democrats—smart people with admirable ideas, but hardly in a position to stand up to Status Quo Republicans. New Deal–style Democrats were conspicuous by their absence.

The financial sector was saved, largely intact, by unprecedented government support. If homeowners had received the same level of support in 2008-2009—for example, in the form of cheap refinanced mortgages—what would have happened? The American economy would have recovered, house prices would have risen, and everyone involved would have looked like a genius. Modern central banks control the price level and this has a primary, direct effect on asset prices—including housing. In most of the country, house prices bounced back but millions of homeowners could not finance their way through the trough. Powerful people in the financial sector could obtain cheap loans, even in the darkest days, because their access to credit was the top priority for both the Bush and Obama administrations.

The result, in rough chronological order, was: mass unemployment, greater inequality, collapsed opportunity, confused anger, and President Trump. The efforts put into financial reform—making sure this could not happen again—by Messrs. Bernanke, Geithner, and Paulson were weak. They lament that next time the central bank will not have the tools to deal with an incipient crisis. If that proves true, it is because their generation undermined the legitimacy of the Federal Reserve through inattention to regulation, consumer protection, and blatant bad behavior before the crisis, and through subsequently allowing the Too Big To Fail banks to become even larger and more dangerous—the total indebtedness of JPMorgan Chase today is in the range of $2.5 trillion.

What are the implications for people who would like to call themselves progressives? Hundt has a broader vision of what government could do, but the details remain slightly elusive. He argues that the FCC in the 1990s helped create the basis for broader investments in the digital economy, and this benefited many people. He also suggests there are analogies that could be implemented for energy, clean water, and much more. Probably he should develop those ideas more fully in another book—and preferably soon.

You might or might not like the work of the Hamilton Project, organized in 2006 under the auspices of the Brookings Institution, but there is no question that they helped prepare the Small Ball Democrats for another round in power. Not only were their ideas tested in numerous proposals, panel discussions, and debates, but their smart young people were given every possible policymaking opportunity.

When Obama did make progress, for example in terms of extending health-care coverage, it was in part because of these diligent efforts. When Obama struggled, from a progressive point of view, it was primarily due to problems in the financial sector—a blind spot in terms of Hamilton Project preparation. Anyone who thinks that President Obama did all he could to advance a progressive agenda, under difficult constraints, should ponder this: Why were progressive Democrats shut out of almost all influential positions throughout the Obama years?

It is unlikely that the next Democratic president will want to be seen as another reincarnation of the Clinton administration. But are the potential home-run policy ideas being debated and honed in sufficient detail? Who will be hired—and with what experience—to be in charge of implementation? What are the plans for regulating the financial sector, which is more powerful than ever? And who exactly will be in charge when anything starts to go wrong in the macroeconomy? On these questions may turn both the election and the future of American democracy. 

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