9/11 exposed our defense
vulnerability. The housing crisis exposed
the fragility of our financial system. This
week, the shooting in the Pittsburgh synagogue and the sending of bombs to
Democratic leaders highlighted the frailty of our social fabric. It’s hard to feel solid and secure at this particular
moment in history.
Last week I attended a program
put on by the Becker Friedman Institute at which former Treasury Secretary Hank
Paulson and former Senator Chris Dodd spoke about the financial crisis as we
are now a decade past the crash (although still feeling economic and political
ripples from it). Paulson and Dodd were
two principal architects of the stabilization and recovery efforts undertaken
by the government to pull us back from the edge of the abyss. While there was a great deal of pain
suffered in the U.S., and some may never fully recover, the efforts of people
like Hank Paulson, Chris Dodd, Ben Bernanke and Tim Geithner undoubtedly rescued
us from something much, much worse. And
both agree that the regulatory scheme put into place makes it less likely that
we will have another fire like the one we had in ’08 following the collapse of
Lehman Brothers.
Paulson admitted he had a lot of
sleepless nights with visions of breadlines throughout the crisis, with the worst
moment coming when he knew that Lehman would fail. He asserted that panics by definition are
unpredictable and both he and Ben Bernanke underestimated how badly this one
undermined the financial system. Never
before had the U.S. experienced a general decline in home mortgages. Ben Bernanke missed the level of contagion
that the crisis caused.
He bemoaned the lack of authority
that he had to manage the crisis, but credits the fact that he had built
relationships on both sides of the aisle before the crisis hit. He also was able to stabilize Fannie Mae and
Freddie Mac before Lehman failed as they were the only source of mortgage
credit at the time. He said that they were able to use the authority they had imaginatively
by guaranteeing funding for Fannie and Freddie rather than injecting capital
directly. In the U.S., putting public
money in a private company is a “red line.”
The TARP program, while
unpopular, was sophisticated and successful.
They were able to persuade 700 banks to take TARP money, thereby avoiding
singling out the weaker banks which would have exacerbated the crisis.
Interestingly, both Paulson and
Dodd defended their actions during the crisis.
Paulson said, “Even if I were omniscient, I don’t know what I would have
done differently. I didn’t have all the authority I needed.” Likewise, Chris Dodd asserted that, “I will
go to my grave believing we did the right thing at that moment.” Both are probably correct.
Paulson in particular made two
comments that leave large unanswered questions.
First, Paulson said that he would rather have a lot of authority and a
high bar for using it rather than have to go back to Congress. Secondly, he regretted that they were not
able to communicate to the public and create a better understanding of why it
was critical to save the financial system.
Indeed, the presentation itself was interrupted by a single protester (that
was escorted quickly out of the room) who screamed at Paulson for not doing
enough for “the people” and that they had bailed out the banks.
As to the first issue, I understand
that as in war, a financial national emergency requires the granting of authority
to the government and flexibility to use that authority that it would not
ordinarily possess in normal times.
Still, Paulson’s blanket statement leaves open many questions. What type of authority? To do what, exactly? What would the triggers for granting such
authority be? How long would such
authority last? Paulson seems to argue
for the ability under certain circumstances to at least dictate “curfews” if
not financial “martial law.” Exactly
what would that authority look like. As
with the “red line” of putting public money into private enterprises, Americans
are loath to grant blanket, unlimited, unaccountable authority to any one
person or even a committee.
I am much more sympathetic to his
second point concerning their failure to communicate adequately to the American
public. First, they did not want to
spook the public and make a liquidity run worse. But second, it may be that, like “Sully”
landing his flight in the Potomac that same winter, we had just the right
people in the right positions to deal with the emergency. The skill set needed to fix the problem is
not the same as communicating a complex idea to the public. None of Paulson, Tim Geithner or Ben Bernanke
will ever light up a room with their public speaking skills. But all were calm, collected and focused at
a time we most needed them. In fact,
Paulson commented that early in the crisis, Ben Bernanke in a meeting of
treasury officials and congressmen calmly said, “If you do not act within days,
the entire financial system of the United States, and much of the rest of the
world will melt down.” If I had to
choose between great orators and adept problems solvers at that time, I would
go with the latter.
Interestingly, having just seen Gordon
Wood, Wood noted in his book, “Friends Divided” ’s recent book on Jefferson and
Adams, Jefferson scorned paper money and banks.
Jefferson agreed with the French Philosopher, DeSutt de Tracy that “all
paper money was a frenzy of despotism run mad.” And Jefferson proclaimed that, “We are
undone, my dear Sir, if this banking mania is not suppressed.”
How prophetic.
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