It’s worth reflecting on this quote on the ten-year anniversary of the financial crisis,
because it speaks to how the architects of the bailouts shaped our
culture. Tim Geithner, Ben Bernanke, and Hank Paulson, the three key men
in charge, basically argue that the bailouts they executed
between 2007 and 2009 were unfair, but necessary to preserve stability. It’s
time to ask, though: just what stability did they preserve?
These three men paint the financial crisis largely as a technical
one. But let’s not get lost in the fancy terms they use, like
“normalization of credit flows," in discussing what happened and why. The
excessively wonky tone is intentional - it's intended to hide the politics of
what happened. So let’s look at what the bailouts actually
were, in normal human language.
The official response to
the financial crisis ended a 75-year-old American policy of pursuing broad
homeownership as a social goal.Since at least Franklin Delano Roosevelt, American leaders had
deliberately organized the financial system to put more people in their own
homes. In 2011, the Obama administration changed this policy, pushing renting over owning. The CEO of Bank of
America, Brian Moynihan, echoed this view shortly thereafter. There are many
reasons for the change, and not all of them were bad. But what’s important to understand is
that the financial crisis was a full-scale assault on the longstanding social
contract linking Americans with the financial system through their house.
The way Geithner orchestrated this was through a two-tiered series
of policy choices. During the crisis, everyone
needed money from the government, but Geithner offered money to the big guy,
and not the little guy.
The response to the financial crisis was about reorganizing property
rights. If you were close to power, you enjoyed unlimited rights and no
responsibilities, and if you were far from power, you got screwed. This
shaped the world into what it is today. As Levitt pointed out, when people have
no stake in the system, they get radical.
Did this prevent a
full-scale collapse? Yes. Was it necessary to do it the way we did? Not at all.
Geithner, Bernanke, and Paulson like to pretend that bank
bailouts are inherently unpopular—that they were wise stewards resisting toxic
(populist) political headwinds. But it’s not that simple. Unfair bank
bailouts are unpopular, but reasonable ones are not. For an alternative, look
at how a previous generation of Democrats handled a similar, though much more
In 1933, when FDR took power, global banking was essentially
non-functional. Bankers had committed widespread fraud on top of a rickety and
poorly structured financial system. Herbert Hoover, who organized an initial bailout by establishing what
was known as the Reconstruction Finance Corporation, was widely mocked for
secretly sending money to Republican bankers rather than ordinary people. The new administration realized that
trust in the system was essential.
One of the first things Roosevelt did, even before he took
office, was to embarrass powerful financiers. He
did this by encouraging the Senate Banking Committee to continue its probe,
under investigator Ferdinand Pecora, of the most powerful institutions on Wall
Street, which were National City (now Citibank) and JP Morgan. Pecora exposed
these institutions as nests of corruption. The Senate Banking Committee made public Morgan’s "preferred list,"
which was the group of powerful and famous people who essentially got bribes
from Morgan. It included the most important men in the country, like former
Republican President Calvin Coolidge, a Supreme Court Justice, important CEOs
and military leaders, and important Democrats, too.
Roosevelt also ordered his attorney general "vigorously to
prosecute any violations of the law" that emerged from the
investigations. New Dealers felt that "if the people
become convinced that the big violators are to be punished it will be helpful
in restoring confidence." The DOJ indicted National City’s Charles Mitchell for tax
evasion. This was part of a series of aggressive attacks on the old order of
corrupt political and economic elites. The administration pursued these cases,
often losing the criminal complaints but continuing with civil charges. This
bought the Democrats the trust of the public.
When Roosevelt engaged in his own broad series of bank bailouts,
the people rewarded his party with overwhelming gains in the midterm elections
of 1934 and a resounding re-election in 1936. Along
with an assertive populist Congress, the new administration used the bailout
money in the RFC to implement mass foreclosure-mitigation programs, create
deposit insurance, and put millions of people to work. He sought to save not
the bankers but the savings of the people themselves.
Democrats did more than save the economy - they also
restructured it along democratic lines. They passed laws to break up banks, the emerging airline industry, and electric utilities. The administration engaged in an
aggressive antitrust campaign against industrial monopolists. And Roosevelt
restructured the Federal Reserve so that the central bank was not "independent"
but set interest rates entirely subservient to the wishes of
In 1938, Franklin Delano Roosevelt offered his view on what causes democracies to
proves that dictatorships do not grow out of strong and successful
governments," he said, "but out of weak and helpless ones."
Did the bailouts of ten
years ago work? It’s a good question. I don’t see a strong and vibrant
democracy in America right now. Do you?