It's difficult to draw a straight line from the financial crisis to the rise of Trump populism. But mistakes and lost opportunities abound.
No justice, no peace. Or peace of mind, at least.
After I wrote about the tenth anniversary of the implosion of Washington Mutual, the largest banking failure in American history, my email box flooded with reader comments.
Most weren’t former employees. All were longtime Seattleites with feelings of betrayal and outrage that 10 years have not softened. Most of all: Why didn’t anyone go to prison, or at least see their compensation clawed back, especially former CEO Kerry Killinger?
A few years ago, when I was the interlocutor for Timothy Geithner at Town Hall Seattle on his book tour, I pressed him about this.
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The former president of the New York Fed and later Obama Treasury Secretary said “Old Testament” retribution would have endangered a still-fragile financial system.
Geithner repeated some of this at a recent Brookings Institution roundtable.
Doing the right thing, he said, “was mirrored by what we faced across the country and that gap between what we thought was right, what we thought was the best of the available options, the gap between what we thought was going to provide the broadest benefit…as quickly as possible, and what people thought was fair and just.”
Bush Treasury Secretary Hank Paulson (the Panic erupted at the end of the W era) said, “You don’t want to reward the arsonist. And so we were forced to do things to protect the American people which are by definition going to be hard to defend.”
He said officials struggled with that defense: “It is very, very hard to explain that the system was so complex, so interconnected that we had to go to the source and Wall Street was like the heart. … we had to go to the heart, we had to go to the source to stop the bleeding. Otherwise it was going to kill the economy.”
Geithner and Paulson were joined in the discussion by then Federal Reserve Chairman Ben Bernanke.
The three no doubt steered the world away from a second Great Depression. We were blessed to have a trio of such expertise and cool-headedness — something not in abundance in today’s D.C. But their desperate improvising in the fall of 2008 came at a cost.
Nobody went to prison, even though crimes were committed.
Nobody saw their outrageous compensation clawed back.
The big banks got bigger.
The system is still so complex and interconnected.
Reforms — the largest being the Dodd-Frank Act — are insufficient to stave off another catastrophe. Indeed, Republicans are busy rolling back Dodd-Frank.
We didn’t get a 21st century Glass-Steagall Act, the Depression-era law that kept the system safe for decades until it was repealed in 1999.
And no wonder, considering the political power of the big banks and Wall Street — something they completely lost in the Depression.
Barry Ritholtz, the equities analyst and commentator, put together a chart that perfectly summarized the causes of the Panic.
They included ideology (anti-regulation zealots), derivatives, mortgages and securitization, financial leverage, the housing boom, easy credit from the Fed, and broader economy trends such as high oil prices. Together, they made an explosion inevitable.
After the system was stabilized, new President Barack Obama underestimated the severity of the wound. True, he succeeded in getting Congress to pass an $832 billion stimulus package. This saved an average 1.6 million jobs for four years and raised output. It was also essential in averting another Great Depression. Credit is due.
But Obama told Geithner that he would not be satisfied with only this accomplishment. So he invested enormous political capital in expanding healthcare coverage to Americans. Although the Affordable Care Act is more popular than ever, Republicans used fear tactics against the bill to retake Congress in 2010. Democrats fecklessly failed to defend Obamacare as helping average people.
So it’s an interesting counterfactual to wonder what might have happened if Obama had focused on relief for homeowners, injected even more stimulus aimed at creating jobs and bringing the rule of law to Wall Street.
For example, Nobel Laureate Joseph Stiglitz wrote in August, “The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured, and more flexible fiscal stimulus.
“Had it done so, the economy’s rebound would have been stronger, and there would have been no talk of secular (long term) stagnation. As it was, only those in the top 1 percent saw their incomes grow during the first three years of the so-called recovery.”
Perhaps. But not only Obama was to blame. The Republican-controlled Congress instituted a ruinous austerity that made further stimulus impossible.
Ten years later, the economy has mostly recovered. But it’s been wildly uneven between superstar cities such as Seattle and many places left behind. Median household income, adjusted for inflation, has not recovered to 2008 levels. Bankruptcies and houses in foreclosure are still high.
I remain unconvinced that a straight line runs from the Great Recession to Donald Trump in the White House. Blame white anxiety and the Russians.
Trump and the Republican Congress have enacted laws and executive orders that hurt the working class, including the white working class. Not least is a massive tax cut for the rich.
In other words, the same people seen as being saved in those fearful weeks 10 years ago.
Does it make any sense?
Maybe the recession, a sharply divided country, and the firehose of information and propaganda shattered the old consensus for good.
Historians (if they exist) will still be arguing over this a hundred years hence.