A decade after the financial crisis,
it is clear the policymakers who averted a second Great Depression never convinced the public that what they did was right: They had to save the banks, and to save the banks, they had to save the bankers.
Those bankers started the fire, after all. The response that felt fair was to let their fire burn. Not to douse the thing in a shower of taxpayer dollars. Certainly not to let the arsonists stroll away to the comforts of their homes in the Hamptons.
The bailouts brought us a raging populism, on both left and right, led by those suspicious of not only the actions
of those at the Federal Reserve and Treasury Department but their motives, too. Treasury Secretary Henry M. Paulson Jr. was a former Goldman Sachs chief, after all. The New York Fed was accused of being too cozy with Wall Street.
Yet in broad strokes, at least, what these policymakers did was correct.
We have counterfactuals to back this up. One is Europe, where policymakers took longer to intervene and ultimately enacted more punitive measures against the banks. They got substantially worse economic outcomes.
We also have a counterfactual here at home: Lehman Brothers, which failed 10 years ago this weekend.
The economic policymakers in charge then maintain that they didn’t want to let Lehman fail. They weren’t trying to teach the big bad bankers a lesson. Rather, they say, the law didn’t allow them to mount a rescue.
Nonetheless, politicians and pundits alike cheered Lehman’s bankruptcy as a deliberate choice.
It was the closest we got to the “Old Testament justice” the public wanted, to use a term often invoked by former New York Fed chairman and Obama treasury secretary Timothy Geithner. It also is when the bottom fell out and a bank run began. Unprecedented bailouts and other extraordinary measures followed.
As the policymakers explain it, there were three main obstacles to convincing the public such seemingly abhorrent actions were necessary.
First, they were overwhelmed by a single existential priority: fixing the financial system and limiting the damage to the rest of the real economy — including in housing and jobs. “When you’re putting out the fire, you don’t have time to explain how the fire extinguisher works,” said Michele Davis, who was Paulson’s assistant secretary for public affairs and director of policy planning.
Second, the financial system is complex and hard to understand. It was, in fact, at least partly the growing complexity of the system that got us into such a mess in the first place.
And third: No amount of oratorical flair, they say, would ever convince the public to support a policy that felt so offensive.
“The core of the political problem and the communication problem is the deep conflict, to any normal human, between what it takes to break a panic and protect from a Great Depression, and what people think is moral and just in the moment,” Geithner says. “And that is not a reconcilable thing. It can’t be solved with eloquence.”
Davis argues: “We need to be very clear that winning public opinion should not be your measure of success, because you’re setting yourself up for failure.”
I disagree. The top priority in the short run is preventing Armageddon. But public opinion absolutely matters in the longer term, as voters act upon their fury. And if winning public opinion over any time horizon really is hopeless, what happens next time there is a crisis?
Since Lehman Brothers failed, the public has only become more distrustful of bailouts. There’s at least one very good reason for that, unrelated to anyone’s elocutionary skills: Federal prosecutors never held anyone remotely senior on Wall Street accountable.
Simultaneously, our political system has become more dysfunctional, the hollowed-out executive branch’s technical expertise more deficient and our political leadership more cowardly. I’m skeptical we can count on President Trump and this Congress to do what’s necessary in a panic, if what’s necessary happens to be unpopular.
One implication, Geithner argues, is that we ought to give more standing authority to technocrats to act in a crisis, so that fewer emergency decisions have to go through the political wringer. For analogies, he points to both the Fed (we insulate monetary policy from politics; why not this, too?) and the Federal Deposit Insurance Corporation (which bails out banks, in exchange for fees and strict regulation; why not have a similar system for nonbanks?). But, alas, Dodd-Frank, while toughening up some rules, actually did the opposite: It took critical “firefighting” tools away from the Fed, the FDIC and Treasury.
So heaven help us next time around, as the fire burns and burns. We can explain to the ashes why we decided water wasn’t the answer.