"It's just hard to figure what else we would've done." That was the verdict of Austan Goolsbee, President Obama's former chief economic advisor, during a fascinating forum earlier this week in Chicago entitled, "Five Years Later: A Financial Crisis Symposium."
Goolsbee's comment pretty much reflected the views of all in attendance, from former heavies in the Obama and Bush administrations and other politicians who were at the center of the storm five years ago, to financial luminaries and journalists. While everyone acknowledged that the economic situation today is hardly optimal, there was universal agreement that policymakers from both parties – in other words, those on the dais – had performed about as well as possible.
That's not to say that no-one acknowledged mistakes – but virtually no-one thought that, given the realities and press of events, anyone realistically could have made different choices or done better.
There was also generally guarded optimism about the future: Clearly, the financial crisis represented a massive one-time write-down of wealth throughout the economy. However, the fundamental ability of the United States to produce and compete – our natural resources, our population and skills, our capacity for innovation – remain in place. Growth at prior rates should resume over the long-term and is (slowly) getting there in the short-term, a trend that will accelerate in the not-distant future as existing inventories finally deplete.
It's hard to argue with this broad outline, except that virtually all participants acknowledged that this view isn't shared in any of its particulars by the vast majority of Americans. What this made most clear was just how much the crisis of 2008 was the crucible of our current politics, including the near-paralysis of all institutions and the implacable anger and disenchantment of virtually everyone else.
The various former members of Congress, of both parties, offered vivid behind-the-scenes accounts of the frantic negotiations over the bailout, in which an emerging fundamentalist Republican faction refused to put up the votes needed for passage of even its own party establishment's proposals and Democrats crystalized as the party of finance.
Everyone agreed, moreover, that the stimulus tried by both administrations had much less effect than any of them expected and conventional economic theory would predict. "Anyone who speaks with confidence on this is a fool," Larry Summers confidently asserted. It's no wonder that the crisis essentially destroyed most Americans' faith in institutions, learned wisdom, and elites.
It's also easy to see how this flared into anger, as the big players who had brought down the casino were bailed out at the expense of everyone else. Summers mordantly observed, "Just wars have undeserved victims. Necessary bailouts have regrettable beneficiaries." Most observers now view the tea party as a neo-Confederate movement fueled by implacable anger at the nation's first black president, but the implacable anger originated earlier, with the financial crisis and the ultimate decision to resolve it by bailing out the banks. That wasn't Obama's doing, but, rightly or not, he soon took ownership of it all.
Despite the protestations of virtually all the forum participants, it could have been different. Former House Financial Services Committee Chairman Barney Frank gave perhaps the only real mea culpa in commenting, "I regret I didn't push harder for more mortgage relief early on. Not just for political reasons but also because it was a drag on the economy." The others, however, felt that sizeable mortgage relief wasn't really an option – too much moral hazard, too much need to save the banks that were too big to fail. The problem is that all those homeowners we let go under together represented a $6 trillion loss of wealth, a not-insignificant hit to the US economy. Which leads to the question of why a small number of large actors can be "too big to fail" but hundreds of millions of Americans collectively are not?
An alternative would have focused on the underlying mortgages that were the root of the problem, rather than simply bailing out the financial intermediaries. The mortgage-backed securities market had bundled – and thereby masked – underlying risks across a multitude of mortgages. As a result, there were too many bad mortgages – but there was also too little information about which mortgages, and thus which mortgage-backed securities, were good or bad. To shore up the collateralized debt obligations at the top of this pyramid scheme, we could have either shored up the pyramid's base – the mortgages held by millions of ordinary Americans – or strengthened the lines of information, the girders holding up the superstructure, that ran from this base up the financial pyramid. With either, liquidity would have returned to the market; with the bank bailout, it still really has not.
This didn't have to be a "bailout" of the type that the panelists worried would lead to defaults by virtually every homeowner: As essentially was done with the banks, authorities could have swapped out a portion of the mortgage value for an equity share in future sale proceeds, keeping people in their homes, value in their mortgages for the lenders and recouping some of that value over time for the taxpayers. Instead, we saved the top of the pyramid because it was "too big to fail"; that's great, but it's now resting, with all its weight, on top of a collapsed foundation.
It's not surprising that faith in both the competence and fairness of elite institutions has collapsed, as well. That's not entirely fair, of course: The stimulus and, particularly, the actions of the Federal Reserve kept the situation from becoming worse. It's not at all clear that government institutions and traditional economic theory don't work perfectly well within the confines of normal events – but when the situation turns chaotic (in the scientific sense), it is by definition unmanageable.
The role of social institutions must be to keep events from reaching such a pass. As Mervyn King, the former Bank of England governor, pointed out, in this context that means keeping there from being anything "too big to fail" to begin with. Five years later, that's still "what else we could've done."
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