What Happened to Barack Obama and His Ideas in the Fall of 2008 ?

A new insider account reveals how the Obama administration’s botched bailout deal not only reinforced neoliberal Clintonism, but also foreshadowed an ongoing failure to fulfill campaign promises.

In November 2008, as a financial mudslide that had slowly been accelerating for months accumulated increasingly persuasive comparisons to the collapse that triggered the Great Depression in 1929, Time magazine ran a cover showing Barack Obama’s smiling face inserted in place of Franklin Delano Roosevelt’s. The soon-to-be forty-fourth president sits in the thirty-second’s open-topped car, wearing Roosevelt’s lucky campaign hat, his grin gripping Roosevelt’s trademark long cigarette-holder. The image suggested Obama, the president-elect who promised hope and change, could follow in his Democratic predecessor’s footsteps. Roosevelt met economic crisis with massive public works programs that gave the dignity of employment to millions of Americans, and—more importantly in that era of rising fascism—helped restore their faith in the U.S. government’s ability to meet their needs.

Time’s article about Obama-as-Roosevelt came a week after a New Yorker feature that sported a similar illustration but took a more tempered view. There, journalist George Packer quoted Cass Sunstein, Obama’s onetime academic colleague and sometime political advisor, describing the newly elected president as post-partisan and a “visionary minimalist”—a man little devoted to great change. This attitude, Packer noted, made Obama “distinctly un-Rooseveltian.” Before long, Packer’s more cautious view was vindicated. By 2009, when the historian William E. Leuchtenburg put out a new edition of his book on the post-1945 presidency, In the Shadow of FDR (1983), adding a chapter on Obama’s first hundred days, Leuchtenburg could already note how frequently “Obama expressed a degree of separation from the age of Roosevelt.” He even quoted the new president as saying, “My interest is finding something that works. . . . whether it’s coming from FDR or it’s coming from Ronald Reagan.”

For the better part of a half century, the Democratic Party has been in this multigenerational crisis over its past. Campaigning against Ronald Reagan in 1980, Jimmy Carter disowned the New Deal’s effort to put Wall Street in harness to Washington, declaring “we believe that we ought to get the Government’s nose out of the private enterprise of this country. We’ve deregulated . . . to make sure that we have a free enterprise system that’s competitive.” Bill Clinton fully assimilated Reaganism in 1996, saying “the era of big government is over.” And now some progressive presidential candidates—together with a base of millennial Democrats—are decrying Obama’s presidency as the last emanation of the Carter-Reagan-Clinton synthesis, a retread of neoliberalism whose weak program for recovery from the economic crisis of 2008 ensured nearly a decade of employment doldrums that aided the rise of Donald Trump.

Reed Hundt, once Clinton’s chair of the Federal Communications Commission and a member of Obama’s transition team, has made the progressives’ argument effectively in his new book A Crisis Wasted. Obama, Hundt believes, made decisions while still a United States senator and then as president-elect that determined the course of his presidency. In the post-election, pre-inauguration winter of 2008–2009, the ordinarily maddeningly self-assured titans of finance—the same ones who, earlier in the year, counseled government inaction in the interest of letting the market discipline its own—were suddenly, and convincingly, prophesying doom unless Washington did something dramatic to avert economic catastrophe. While many voters hoped Obama’s policies might represent a dramatic change along the lines of the New Deal, instead Obama acquiesced to emergency considerations and ideological blandishments aimed at tempering expectations and a return to “normalcy.”

Obama swiftly switched from FDR redux to Clinton reborn because, Hundt points out, he sought experienced advisors to staff his administration-in-waiting, and the Democrats most accustomed to the White House were those who had served Bill Clinton. Obama named Clinton’s chief of staff, John Podesta, to head his transition team, and Podesta brought with him other Clinton appointees who thought their job now was one of restoration. As Hundt writes, “People are policy,” and the incoming Obama team wanted to bring back the policies of the 1990s and with them, the prosperity of that era. The Clinton personnel shared a more Reaganesque than Rooseveltian view, believing their success in the late twentieth century resulted from “a reduction in the size, capacity, and purpose of the public sector.” The Clinton people, following Carter, believed the New Deal had led ultimately to over-regulation and inhibition of capitalism’s great energies, and that the long boom of the 1990s owed to their getting government out of the way of business and banking, while still retaining state programs necessary to promote opportunity for the majority of Americans.

Yet, whatever one may think of the Clinton policies’ effects in the 1990s, the early twenty-first century and its economic calamities called for a profoundly different approach. The embryonic Obama administration’s adoption of Clintonesque neoliberalism was not only an inadequate response to the economic crisis. It also constituted, Hundt argues, a failure of the new president to fulfill his campaign promises. Obama could have chosen to “align himself with democracy, and then aim to help directly the great preponderance of Americans,” Hundt says, but he did not. A critical mass of voters who had chosen hope and change came to believe their president and their government did not represent or even heed them—with consequences we now know.

Hundt’s book makes an invaluable contribution to knowledge about this critical moment in 2008–2009. Because Hundt was there in Obama transition headquarters, he can recall what he himself saw and heard. He has, since then, had access to key figures who were there, too. Hundt’s notes attest to interviews with more than a dozen officials who played important parts in crafting the Democratic policy response to the crisis. At times their testimonies conflict with one another, and Hundt lets them, which probably portrays with considerable accuracy the uncertainty and disagreement that permeated the time.

The banking relief bill, for example, represents how quickly policy was made during these fraught weeks. The administration of George W. Bush had backed the bill in September of 2008 in an effort to forestall a complete collapse of the banking system; it allowed the president to spend large sums of money bailing out the financial sector. The bill’s supporters, including Treasury Secretary Hank Paulson and New York Federal Reserve Bank President Timothy Geithner, did little outreach to Congress, believing the self-evident emergency should make its own case. Geithner took the view, “I just wanted Congress to pass it as fast as possible while screwing it up as little as possible.”

This style of diplomacy initially failed to sway the House of Representatives, which rejected the bill. But Senator Obama and other backers of the bill contacted the White House to lend their support, and then lobbied members of Congress, changing enough minds to get the Emergency Economic Stabilization Act through the House, with a majority of Democrats and nearly half the Republicans lining up behind it. When Obama and his Republican opponent, John McCain, both voted for the bill from their seats in the Senate, Obama’s view that a matter of compelling national concern could garner bipartisan support was vindicated. It was a hope that carried over into the effort to craft a bill for bailing out the entire economy.

Obama, among many others, supported the bank bailouts because private lenders pump the lifeblood of a capitalist economy, and as of the fall of 2008 they had nearly stopped altogether. With the financial markets shut down, housing purchases and business starts followed; unemployment began to rise. It would take time to clear bank balance sheets and get credit circulating once more—time during which Americans would find themselves without work, drawing down savings, unable to pay their bills or ultimately to sustain shelter and food for themselves and their families. They too needed assistance.

The method of providing such aid was well known in economics and history: the government ought to spend money to make up the shortfall, thus ensuring the employment of Americans, continuing their borrowing and spending, and stimulating the slumping economy back to action. As a rule of thumb, spending 2 percent of GDP would bring down the unemployment rate by 1 percent. Economists in 2008 and early 2009 realized that, given the jobless figures, an adequate spending package would run at least $1 trillion and possibly more. Paul Krugman, the economist who had just won the Nobel Prize, explained how to do the calculations in his widely read New York Times column and blog.

Hundt’s book is at its best in demonstrating how the stimulus legislation—the American Recovery and Reinvestment Act—ended up nowhere near that number. Hundt has spoken with Larry Summers, Christina Romer, Peter Orszag, and others who played a critical role in determining the Obama pre-administration strategy for getting stimulus money out of Congress. Hundt places his readers in the room. Romer, a professor of economics from the University of California, Berkeley, who had written considerably on the Great Depression, tried mightily to get the team to support a bigger number; her own calculations suggested the stimulus should run around $1.7 trillion. Summers, the former secretary of the Treasury under Clinton and an estimable academic economist in his own right, did not dispute her substantive conclusions; he simply thought the sum too daunting to get past Congress. Orszag, also a former Clinton economic advisor and then director of the Congressional Budget Office, understood that Obama wanted to keep health insurance as a priority and was leery of ballooning deficits.

It is a rich and frustrating experience re-living these contentious discussions, and in relating them, Hundt shines. He lets his sources speak for themselves, differing sometimes not only on what they say should have happened, but on what they say did happen. The book here is gripping and appalling in approximately equal measure. Hundt clearly sympathizes with Romer and the arithmetic. He also plainly understands that gender was part of the reason she did not prevail. At one point in his narrative, Romer tries to make an impression by swearing in front of the president-elect. Obama uses it as an occasion to get a small laugh by calling her out, and Hundt notes that this remark put Romer off in front of the “male-dominated group.” (Hundt’s interview with Romer, like others, suggests that profanity is not alien to her.) There was a clubbiness among the men who had served in government before and who could claim the hard pragmatism of experience.

Romer was right, but somehow to be merely right was also to be basically unserious. Summers told her not to mention the figure of $1.7 trillion; he talked her down even from $1.2 trillion to something around $800 billion—which would leave unemployment somewhere around 8 percent, the planners then believed. Even with a spending bill that large, Hundt writes, the team’s “strategic goal was to end the recession, but not to guarantee robust growth and a rising standard of living.” The anti-Romer consensus carried the day, on the view that the Democrats should demonstrate fiscal responsibility: “An excessive recovery package could spook markets or the public and be counterproductive.” Congress did give them essentially what they asked for, but barely, an anonymous source tells Hundt. “Getting that 800 was very tenuous. It almost fell apart several times. Krugman and everybody are always talking crap.”

In the end, the stimulus would prove weaker than even Romer thought. Unemployment would remain over 9 percent until late in 2011. The unimpressive recovery surely contributed to the massive vote swing toward the Republicans in the 2010 midterm elections and their takeover of the House of Representatives; the slow hard march back to prosperity left many voters still bitter even in 2016. To the extent that the decision to ask for a smaller stimulus resulted from, as David Axelrod tells Hundt, “political judgments, not economic judgments,” it backfired. The Democrats gained no evident support for their demonstration of restraint in crafting a spending package, and their apparent ineptitude in fighting the recession weakened them when afterward they sought vital environmental and health care legislation.

The question, then, is what the Obama team could, or should, have done differently. They could have asked for more stimulus at the outset; even if it is true that they could not have gotten more, at least they would have been on record as believing more was necessary. Al Gore—among others—warned it would be much harder to get a second stimulus bill after a failed first one than it would be to get a big bill at the start. Romer wanted at least to manage expectations and explain how modest an $800 billion stimulus might prove. “Why can’t we actually say the truth?” she asks, at one point. Instead, the Obama team negotiated against themselves, choosing a lower number, and then saying they believed it to be sufficient.

Hundt also argues that by the time Obama’s team was considering a stimulus bill, they were already in a bad bargaining position. Before the election, Obama had endorsed the bank relief bill without even discussing the need for borrowers’ relief. At the time, Speaker of the House Nancy Pelosi, Hundt says, reacted to the bank relief bill by saying, “You’ve got to be kidding,” and urging that there be “money for Main Street as well as Wall Street.” But the Bush administration, with Obama’s support, deferred the stimulus discussion and, Hundt believes, thus “snared” Obama. The bipartisanship that had so energized Obama vanished once Wall Street got its life preserver.

In the end the comparison to Roosevelt still haunts the Obama team. The economist Austan Goolsbee tells Hundt that the Obama people consciously chose not to emulate Roosevelt who, in their view, deliberately “let things get so bad” by not cooperating with outgoing president Herbert Hoover in the months before his inauguration that he arrived in the White House with a prostrate Congress willing to do any of his bidding. Roosevelt, in their view, sacrificed his countrymen to gain political advantage.

Goolsbee is here echoing Geithner and Obama himself, who have made similar remarks in their defense over the years. Their history of Roosevelt’s behavior in the bad early months of 1933 is so similar, they must have got it from a common source. In any event, Roosevelt did no such thing: Hoover did not offer cooperation to his waiting successor; rather, he demanded capitulation from him. Writing to President-elect Roosevelt, Hoover explained that his successor could combat the Depression only by forswearing inflation, budget deficits, and the massive public works programs he had promised in the campaign, thus proving himself a fiscally responsible Democrat. Only by making these pledges, Hoover said, could Roosevelt restore confidence and allow the easily upset engines of finance and business to resume their proper operations. Privately, to a fellow Republican, Hoover admitted he was not seeking any joint venture; rather, he was asking Roosevelt to trade his own agenda for Hoover’s: “I realize that if these declarations be made by the president-elect, he will have ratified the whole major program of the Republican Administration; that it means the abandonment of 90 percent of the so-called new deal.”

Roosevelt declined the Republican’s request for surrender. In thus evading the trap Hoover had laid out, Roosevelt ensured he could fulfill his campaign promises. Democracy around the world was in a bad position, Roosevelt believed, and he aimed to restore it. That was why he had told voters he would get Congress to adopt unemployment and old-age insurance, minimum wages and maximum hours laws, subsidies for farmers, and also to provide jobs on public works—not merely so that Americans would have incomes, but so they would feel their government worked for them. In building a dam or an airport or a road, in running electrical lines across a landscape to people who never had access to modern energy before, literally bringing power to the people, Washington would “help restore the close relationship with its people which is necessary to our democratic form of government.”

Rather than seeking the chimera of bipartisan cooperation, Obama could have done more to preserve his campaign pledges of progressive hope and change. In so doing, he could have done something to restore Americans’ confidence in our institutions and our democratic form of government. Alas, as Hundt notes, it was a crisis wasted.

Hundt takes up the comparison between Obama and Roosevelt in an extended riff at the end of his book. Unfortunately, he makes an error in dealing with the 1930s that he avoided in dealing with the 2000s and relies on a single—and unusually undependable—source; Hundt draws almost entirely on the memoirs of the disaffected (and Barry Goldwater–supporting) former Roosevelt aide, Raymond Moley, for his account of the New Deal. It is as if Hundt had relied exclusively on Geithner’s memoir to understand Obama’s administration. But nobody will pick up Hundt’s book for his analysis of the Roosevelt era. People should read it when considering which parts of the Democratic Party’s past should be saved, and which are best left behind.

Obama's Original Sin. By Erich Rauchway.  Boston Review , April 23, 2019

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

The Crisis Last Time.  By Simon Johnson . The American Prospect.   March 29, 2019

Review of :  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

In their new book, Ben Bernanke, Timothy Geithner, and Henry Paulson describe fighting the fire of the 2008 financial crisis. But while they did rebuild the burnt towers of Wall Street, they left Main Street to dig out from the rubble.

The Great Crash of 2007–2009 stripped American middleclass families of wealth. It gave rise to nativist politics on the right and socialism on the left, killing credence in neoliberal market capitalism in both the United States and Europe. It buried the Washington consensus that had energized bipartisan support for U.S. leadership around the world. Indeed, China has replaced the United States as the leading country whose investment drives the global economy.

In his 2018 letter to shareholders, Jamie Dimon, CEO of JPMorgan Chase, described the state of the union as follows: “Middle class incomes have been stagnant for years. Income inequality has gotten worse. Forty percent of American workers earn less than $15 an hour, and about 5% of full-time American workers earn the minimum wage or less, which is certainly not a living wage. In addition, 40% of Americans don’t have $400 to deal with unexpected expenses, such as medical bills or car repairs.”

According to Dimon, cumulative economic growth over the last decade has been half of what it would have been in a normal recovery. As a result the economy is $4 trillion smaller than it should be. In his words, that growth “certainly would have driven wages higher and given us the wherewithal to broadly build a better country.”

It is widely recognized that the economic disappointments of the last decade made it extremely difficult for the Democratic presidential nominee in 2016 to run on her predecessor’s record, even though unemployment was at last reaching satisfactorily low levels and wages had begun to increase. Conversely, Donald Trump’s successful campaign is often seen as reflecting voter dissatisfaction with the government’s response to the financial crisis of 2008.

Given the ample volume of hindsight, it takes conviction verging on stubbornness to insist that the United States government under the Bush administration did all it could to prevent the crisis and that both the Bush and Obama administrations did all they reasonably could have done in response. Yet in their three separate memoirs, numerous public statements, and now in their jointly written book, Firefighting: The Financial Crisis and Its Lessons, the trio of President Bush’s Treasury Secretary Hank Paulson, President Obama’s Treasury Secretary Tim Geithner, and both presidents’ Fed Chairman Ben Bernanke have made these claims.

Historians will debate the events of 2007–2009 for decades, and the leading actors, namely the trio of Bernanke, Geithner, and Paulson, should be complimented for their many good steps as well as their willingness to account for their decisions. But they were wrong in 2008, and they are especially wrong now to promote the wrong lessons from their experience. In Firefighting, for instance, they look to the next crisis and correctly assert that the Federal Deposit Insurance Corporation (FDIC) should be able to “fully stand behind” the obligations “of large complicated banks on the brink of failure . . . while winding them down in an orderly fashion.” But in an FDIC resolution shareholders and creditors take some loss. The firefighters rejected that approach in 2008, and they continue now to argue that in a crisis it is wrong “to ensure that risk takers pay a price for their risk taking” such as by “imposing haircuts on creditors.” By arguing that risk takers should be held harmless in the next crisis, they are restating the position that tied President Obama to one of the most unpopular government actions in history—namely, the bail-out. No future president should, or would want, to take this advice.

Notwithstanding many actions by the trio in emergency conditions, their reaction to the recession was not what the country deserved. Indeed, it had at least three serious flaws that we should be revisiting and learning from for next time.

First, they bailed out Bear Stearns in March 2008, let Lehman Brothers go bankrupt on September 15, 2008, and bailed out AIG on September 16, 2008. In the first of these moves, they had another firm buy the failing firm. In the middle decision, they magnified the losses for everyone by implementing no plan in advance. And in the last of these moves, the government took control and fired management.

This unpredictable signaling intensified the dreadful reaction to the Lehman bankruptcy. The government’s sinuous path of decision-making inspired a lack of confidence. That in turn contributed to the over-reaction of the real economy to the financial crisis, leading to excessive reductions in investment and employment.

Second, at all times, the trio’s top priority should have been helping the real economy recover from the economic calamities of the Great Crash. At the time, it was no secret that domestic construction jobs were evaporating and consumer consumption was falling. Housing prices had also plummeted: ultimately, homeowners’ equity fell from nearly $14 trillion to about $6 trillion. But instead of taking actions to help Americans, the trio (and the presidents they advised) chose strengthening the financial sector as their primary objective. The misguided belief was that by instilling confidence in the balance sheets of big financial firms, they could cause benefits to flow through to Main Street.

This error in strategic goals led to a series of bad policies. First, instead of passing what the trio refer to as a “small” fiscal stimulus composed of tax cuts in February 2008, the Republican White House could have joined with the Democratic Congress to jumpstart more spending. Second, instead of protecting firms from having to take write downs on the debt and mortgage securities they held on their balance sheets, the trio could have used the authority of the Housing and Economic Recovery Act (HERA) to re-finance or restructure troubled mortgage loans or constrain foreclosures in a meaningful way. Third, instead of the modest recovery program enacted in February 2009, the trio could have championed a significantly larger recovery program. Geithner, in a memorandum he co-wrote with Larry Summers (likely with Bernanke’s input too) for President-elect Obama on December 15, 2008, recommended that the second economic stimulus to create Main Street jobs not be greater than approximately $800 billion because an “excessive recovery package could spook markets or the public and be counterproductive.” And fourth, instead of returning the $200 billion in unspent bailout money to Congress after the big banks had passed the stress tests in 2009, the trio could have spent the unused bailout money to protect homeowners and jumpstart job creation. 

The third serious flaw in the recovery effort was that the Troubled Asset Relief Program was not a good law. Its principal defect was that Paulson could act with no supervision: he could buy whatever he wanted (including the most spurious assets traded). Moreover, no bank benefitting from the one-sided sale would suffer any limitation on bonuses much less replacement of management, and the actual amount of government funding would prove more than twice what the banking system actually needed for recapitalization.

In Firefighting, the trio acknowledge that the post-Lehman crisis compelled TARP’s passage—indeed, the trio have argued for a decade that Congress would not pass a useful bill without a crisis. But it is more accurate to conclude that the trio’s approach invited an avoidable crisis in order to pass a bad law. Indeed, the smoke of the Lehman explosion was the only reason a bill that awful could be pushed through Congress.

The timing, too, in retrospect is suspect. In September of 2008, for example, the trio had told Congress that the emergency required weekend action. This proved untrue. Moreover, by the time TARP was enacted in October 2008, some of the biggest Wall Street firms in which Paulson insisted on investing did not even need or want the money. The TARP legislation is not a model of what was then or is now desirable. Instead, in 2010, Dodd-Frank Wall Street Reform and Consumer Protection Act wisely used the FDIC to guarantee troubled firms’ obligations while meting out haircuts to equity and debt holders as the method for recovery.

None of this is to argue that drastic times do not call for drastic measures. But when a fire seems poised to break out again in the financial sector, government leaders should throw water on the sparks instead of waiting for a full-fledged conflagration. And if the fire rages anyhow, government should not rebuild the burnt towers of Wall Street while leaving Main Street to dig out from the rubble. The real economy is more important than the financial sector. Indeed, in the next crisis or before, the financial sector should help fund, through taxes or mandated investment, the recovery of the real economy. Perhaps then the financial sector might not grow as dangerously large as it has.

Exactly what needs to be done when the next crisis hits cannot be precisely predicted, but whoever fights that fire must remember that transparent, equitable, and justice-delivering government is not expendable. When the going gets tough, tough-minded government leaders have to trust that the United States can recover from the worst of financial shocks but know that it cannot long survive an ethic of saving the well-off at the cost of the rest of the country. What Theodore Roosevelt called the “malefactors of great wealth” should at least lose some of that wealth as their just desserts are served.

Playing with Fire. By Reed  Hundt. Boston Review . May 10, 2019.