Two years ago, the top honchos at the Fed, Treasury and the Wall Street banks were running around like Chicken Little warning that the world was about to end. This fear mongering, together with a big assist from the elite media (i.e. NPR, the Washington Post, the Wall Street Journal, etc.), earned the banks their $700 billion TARP blank check bailout. This money, along with even more valuable loans and loan guarantees from the Fed and FDIC, enabled them to survive the crisis they had created. As a result, the big banks are bigger and more profitable than ever.
Now, the same crew that tapped our pockets two years ago is eagerly pitching the line that their bailout was good for us. It may be the case the history books are written by the winners, but that doesn’t prevent the rest of us from telling the truth.
Let’s step back to where we were two years ago. The huge investment bank Bear Stearns had collapsed. So had Fannie Mae and Freddie Mac, the mortgage giants. Lehman Brothers, the fourth largest investment bank had also gone down. AIG, the country’s largest insurer had been put on life support by the government.
At this point, Merrill Lynch, Morgan Stanley and Goldman Sachs, the three remaining independent investment banks, all faced runs that would quickly sink them absent government intervention. Citigroup and Bank of America, two of the three largest commercial banks, were also almost certainly insolvent. Many other banks also faced insolvency, especially if they took big losses on their loans to other institutions that were about to go bankrupt.
This was when the Wall Street boys made their mad rush for the public trough. They enlisted everyone that mattered in the effort, including Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and Timothy Geithner, then the head of the New York Federal Reserve Bank.
The line was that the economy would collapse if Congress did not immediately rescue the banks. They were prepared to make up anything to save the banks in their hour of need. Bernanke was probably caught in the biggest fabrication when he told Congress that the commercial paper market was shutting down.
If true, this would have been disastrous, since most major companies rely on selling commercial paper to meet their payroll and other routine expenses. If this market shut down, it would mean that even healthy businesses could not pay their workers and suppliers, which quickly cause the whole economy to grind to a halt.
Bernanke did not bother to inform Congress and the public that he had the ability to single-handedly support the commercial paper market. He waited until the weekend after Congress approved the TARP to announce that he would establish a special Fed lending facility to buy commercial paper.
In reality, the Fed almost certainly had the ability to keep the economy going by sustaining the system of payments even if the chain of bank collapses was allowed to run its course. In the 80s Latin American debt crisis, the Fed had an emergency plan to seize the money center banks, and keep them operating, if a default by a major Latin American country pushed them into insolvency.
By the time of the Lehman crisis the financial markets had been severely stressed for over a year. The first major bank collapse had occurred more than 6 months earlier. It would have required a degree of unbelievable incompetence and/or irresponsibility for the Fed not to have devised a similar emergency plan to keep the systems of payments operating in a worst-case scenario.
Furthermore, even if the Fed had been as incompetent as many claim, it would not have taken long for it to improvise a system whereby certain payments would be prioritized and the system of payments would again be up and running. The notion that we would be sitting in a 21st century economy and reduced to barter payments was an invention of the bank lobby to get the taxpayers’ money.
The first Great Depression was the result of a decade of failed policies, not a single bad mistake at its onset. There was absolutely nothing that we could have done back in September-October of 2008 that would have required that we experience a decade of double-digit unemployment. The specter of a “second great depression” is a fairy tale invented by the bank lobby to make the rest of feel good about having given them our money.
We are also supposed to feel good that the vast majority of the TARP money was repaid. This is another effort to prey on the public’s ignorance. Had it not been for the bailout, most of the major center banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society – their loss is our gain.
It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy’s output each year and trillions of dollars of wealth. That money would instead be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer once the economy is again operating near normal levels of output.
Instead, we have the same Wall Street crew calling the shots, doing business pretty much as they always did. The rest of us are sitting here dealing with wreckage of their recklessness: 9.6 percent unemployment and the loss of much of the middle class’s savings in their homes and their retirement accounts. And the lackeys of the Wall Street crew are telling us that we should be thankful that we didn’t have a second Great Depression. Maybe we don’t have the power to keep the bankers from picking our pockets, but we don’t have to believe their lies.
DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.