It’s hard to overstate how deeply Americans despised their government’s response to the global financial crisis. It has helped shape the last decade of American politics, fueling distrust of powerful institutions and speeding a drift toward ideological extremes.
But for all that anger, the engineers of the American crisis response got the economics mostly correct, and more right than most of those — including leading economic thinkers and prominent politicians — who were second-guessing them.
I was a beat reporter covering the events at the time and the key players — including the former Treasury secretaries Hank Paulson and Tim Geithner, and the former Federal Reserve chairman Ben Bernanke — and then wrote a book on the crisis. Looking back on it a decade later, I’m struck by the way that I, and they, misunderstood what “success” would actually mean.
The engineers of the response succeeded in their immediate goal, to preserve the financial system. But they — or, more precisely, they and their political leaders at the time — also left fissures that threaten to undermine the system they sought to preserve. The very underpinnings of modern capitalism are being questioned from all sides. A Republican administration has gleefully cast aside trade deals, for instance, and the energy among Democrats is around democratic socialism.
To understand the challenges and ultimately the failure of the politics of their response, it helps to put yourself back in 2008 and 2009, when the financial might of the United States government — trillions of dollars, cumulatively — was deployed to try to contain the crisis.
Rebuilding the status quo
Mr. Geithner, Mr. Paulson and Mr. Bernanke are centrists in the context of modern American politics, but they are conservatives in the traditional sense — people trying to preserve a system they inherited.
Their strategy was to patch things up as quickly as possible. The goal was not to try to reinvent Wall Street on the fly, but to keep the flow of capital coursing through the global economy while minimizing the depth and duration of the recession that the crisis had caused.
Some 230 academic economists signed a letter attacking the bank bailout legislation that Mr. Paulson proposed as unfair and a potential threat to the vibrancy of private markets.
Mr. Geithner’s disinclination to nationalize banks drew fierce criticism from liberals who argued that the government was essentially funneling money to banks with little assurance they would resume lending.
“Whatever its merits, his bailout plan offers generous subsidies to banks and private investors while protecting bank management and creditors,” John B. Judis wrote in 2009 in a New Republic article titled “The Geithner Disaster.”
Mr. Bernanke’s efforts to pump money into the economy by buying up bonds also met opposition. A group of conservative economists wrote a letter in 2010 arguing that the Fed’s plans to engage in quantitative easing “risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”
These attacks were misguided.
Mr. Paulson’s financial rescue package did not herald an era of socialism on Wall Street; nor did it come at a huge continuing cost to taxpayers. By many measures, it made money.
Mr. Geithner’s stress tests achieved their goal of restoring confidence in major banks without the cost and political damage of nationalizing them. They were successful enough that similar stress tests are now a part of regulators’ tool kits both in the United States and overseas.
Mr. Bernanke’s aggressive monetary policy probably played a role in getting the expansion on track starting in mid-2009. Quantitative easing and low interest rates did not cause a collapse of the dollar or spiraling inflation.
Nobody would argue that the United States economy is perfect, or that the policymakers got everything exactly right.
If Mr. Paulson had secured financial rescue legislation before Lehman Brothers went bankrupt, perhaps the most severe phase of the crisis could have been avoided altogether, though it is a puzzle how he could have gotten the votes for such a plan before the crisis became more severe. If Mr. Bernanke had moved faster — putting an open-ended quantitative easing program in place in 2009 or 2010 instead of waiting till 2012 — maybe full recovery would have come sooner.
It’s not clear how the recovery might have looked had Mr. Geithner embraced a more activist approach to replacing management and taking greater government control of the most troubled large banks, notably Citigroup and Bank of America. Or if he had welcomed a larger program to help relieve borrowers who were underwater on their homes.
The tactics the men chose can be second-guessed, but the result of their efforts speaks for itself. The expansion has lasted nine years, the second longest on record. Although job gains were disappointingly slow for years, the unemployment rate is now 3.9 percent, among the lowest in decades.
From 2007 to 2017, per-person inflation-adjusted G.D.P. rose 6.3 percent in the United States, compared with only 3 percent in the eurozone, where similar policies were embraced more slowly.
In exhaustive research of the history of financial crises, the economists Carmen Reinhart and Kenneth Rogoff found that it takes eight years on average for a society to return to its level of per-person income. The United States did so in 2013, only six years after the peak of the crisis.
The political price
It was Feb. 19, 2009, less than a month into the Obama administration. Mr. Geithner and his colleagues had introduced plans to assist struggling homeowners, which many liberal critics considered deeply inadequate.
The human cost of the foreclosure crisis was indeed immense; there were 2.8 million foreclosures that year alone. But the politics of helping troubled homeowners were more toxic than the crisis managers had foreseen.
From the floor of the Chicago Mercantile Exchange, the CNBC broadcaster Rick Santelli began a rant for the ages. “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” Mr. Santelli said, as traders cheered behind him. “President Obama, are you listening?”
“We’re thinking about having a Chicago tea party in July,” he continued.
The term stuck, and was embraced by the conservative activists who propelled Republicans to victory in the 2010 midterm elections — driven, in no small part, by opposition to economic stimulus, financial bailouts and the work of the Federal Reserve.
The policymakers knew history’s warnings about economic policy that reacts too sluggishly to financial crisis.
Mr. Geithner spent some evenings in the darkest days reading in Liaquat Ahamed’s “Lords of Finance” about how an earlier generation of policymakers bungled the response to the Great Depression. Mr. Bernanke is a scholar of that era in his own right.
But they seemed to assume that if they got the economics right, popular support would follow. As Mr. Bernanke wrote in his memoir about the Santelli rant, “I remained perplexed that helping homeowners was not more politically popular.”
There’s a reason, of course, that they were in their roles as appointed technocrats and not politicians. But it isn’t clear that George W. Bush or Barack Obama had any better ideas for bringing along the public than did the men they chose to lead financial policy. The crisis response may well have been a Rubik’s Cube of political and economic challenges too complicated to solve.
It was foreseeable, perhaps, that many on the left would view the Geithner-Paulson-Bernanke strategy as too friendly to Wall Street interests. It was also foreseeable that the libertarian right would loathe the bailouts. More surprising were the ways in which some of the biggest beneficiaries of the strategy became vocal opponents.
The Geithner strategy was based on rescuing Wall Street, using hundreds of billions of taxpayer dollars — while building a more rigorous regulatory system to try to prevent a similar crisis.
But by the time what became the Dodd-Frank Act was on its way to passage in 2010, the financial industry and nearly all Republicans in Congress had committed to all-out opposition of industry regulation. Only three of 178 Republican House members, for example, supported the bill.
Even as Mr. Bernanke’s easy money policies pushed the stock market upward and coincided with a gradually improving economy and low inflation, the drumbeat of commentary was overwhelmingly negative.
You could turn on a financial network at nearly any hour of the trading day and hear complaints about how quantitative easing and zero interest rates were distorting markets. When Mr. Bernanke left office in early 2014, when the stock market was soaring and the unemployment rate was falling fast, only 28 percent of Republicans approved of his performance, according to a Gallup survey.
Success has rarely been so unpopular.
How the crisis broke our politics
In July, Mr. Bernanke, Mr. Geithner and Mr. Paulson were together again. They invited a handful of reporters to interview them in a conference room at the Brookings Institution, where they will be participating in a crisis retrospective in September.
Might the rise of anti-establishment parties around the world — not least Donald J. Trump on the right and Bernie Sanders-esque socialists on the left in the United States — be traced to their work as crisis responders?
“We know from history that financial crises, particularly big ones, do tend to get followed by a populist reaction,” Mr. Bernanke said. “I think we all tried our best to explain what we were doing and work with the politics, as difficult as it was. I think back to the crisis, we were very focused on preventing the collapse of the financial system. And developing our communication to the broad public wasn’t always our first priority.”
He argued, though, that longer-term trends — like stagnation in middle-class wages, social dysfunctions, rising mistrust in government and hostility to immigration — were a bigger explanation for the rise in a politics of extremes.
This analysis seems both correct and incomplete. Of course, the embrace of anti-immigrant nationalism on the right and of socialism on the left have roots considerably deeper than a bank bailout or a quantitative easing program.
But it was the experience of the crisis, and the sense among Americans of all ideological dispositions that they were being asked to foot the bill for someone else’s mistakes — whether by Wall Street C.E.O.s or by Mr. Santelli’s neighbor with the renovated bathroom — that helped make those long-simmering problems boil over.
The response to the crisis was in many ways the high-water mark for a mold of centrist, technocratic policymaking that seeks to tweak and nudge existing institutions toward better outcomes. It also undermined any widespread popular support for that mode of governing for the foreseeable future.
It turns out, when you throw trillions of dollars at rescuing a system that most people don’t like very much in the first place, the result isn’t relief.