FacebookTwitterGoogle+RedditEmail

The Myth That Sold the Wall Street Bailouts

by

This week marks the sixth anniversary of the collapse of Lehman Brothers. The investment bank’s bankruptcy accelerated the financial meltdown that began with the near collapse of the investment bank Bear Stearns in March 2008 (saved by the Federal Reserve and JPMorgan) and picked up steam with Fannie Mae and Freddie Mac going under the week before Lehman’s demise. The day after Lehman failed, the giant insurer AIG was set to collapse, only to be rescued by the Fed.

With the other Wall Street behemoths also on shaky ground, then–Treasury Secretary Henry Paulson ran to Capitol Hill, accompanied by Federal Reserve Chairman Ben Bernanke and New York Fed President Timothy Geithner. Their message was clear: The apocalypse was nigh. They demanded Congress make an open-ended commitment to bail out the banks. In a message repeated endlessly by the punditocracy ever since, the failure to cough up the money would have led to a second Great Depression.

The claim was nonsense then, and it’s even greater nonsense now.

To be sure, without the helping hand of the government, most of the major Wall Street banks would have quickly collapsed. There was a full-fledged run on the big five investment banks. With Bear Stearns and Lehman already having faced bankruptcy, Merrill Lynch, Morgan Stanley and Goldman Sachs were certain to follow suit in the very near future. Citigroup and Bank of America were also bound to fail, by anyone’s calculations.

At best, JPMorgan and Wells Fargo might have survived, but even these two relatively healthy banks could well have been caught up in the maelstrom. This would have meant the demise of Wall Street as we know it. But would it have meant a second Great Depression, defined as a decade of double-digit unemployment?

This is where the hand waving gets fast and furious. After all, we all know that the first Great Depression began with a chain of bank collapses. How could this bank crisis have ended any differently?

Well, for those who have followed economic developments over the last 80 years, it should be easy to see how it would have ended differently. First, unlike the days of the first Great Depression, we have the Federal Deposit Insurance Corporation (FDIC). This is a huge deal because the FDIC is set up to quickly take over a failing bank as part of its routine practices. Typically it goes into a teetering bank on a Friday evening after closing and spends the weekend working over the bank’s books.

On Monday morning the bank is open for business as usual, either as part of a merger worked out by the FDIC or under the FDIC’s temporary management. Either way, business can proceed as usual, with the customers for the most part able to make transactions as if nothing had happened.

The fact that many of the promulgators of the second Great Depression tale had close ties to Wall Street may go a long way toward explainingtheir behavior.

The FDIC doesn’t cover the investment banks, nor does it help other financial institutions that were caught in the chaos created by the collapse of the housing bubble, but it would ensure that we kept a system of payments in order so the country would be able to conduct its business.

The collapse of the investment banks and the loss of wealth by those who had lent them money or had made uninsured loans to FDIC insured banks would have made the immediate downturn worse than what we saw in 2008 and ’09. There is no reason, however, to believe this would have condemned us to a decade of stagnation. For we know the other big secret to avoid another Great Depression: Spend money.

President Franklin Roosevelt did this to some extent with the New Deal, which brought the unemployment rate down to the single digits by 1936. However, it was the massive deficit spending associated with World War II that finally got us of the Depression.

While the attack at Pearl Harbor in 1941 produced the consensus for going to war, the only thing preventing us from having large-scale spending for infrastructure, health care, education and other domestic purposes a decade earlier was politics. If there had been political support for massive spending in these areas, the Depression could have ended in 1931 instead of 1941.

The same situation would have applied in 2008 and ’09. The promulgators of the second Great Depression myth are implicitly claiming that we never would have had any major stimulus in response to an economic collapse even greater than the one we saw.

That is an incredibly strong, unjustified assumption. After all, do we really think that Republican members of Congress would insist that they would never support stimulus even in the face of double-digit unemployment? President George W. Bush pushed through the first round of stimulus in February of 2008, when the unemployment rate was just 4.7 percent. It is ridiculous to imagine that Congress never would have agreed to a stimulus package of spending and tax cuts that could have gone far toward bringing the unemployment rate down toward more normal levels. It would imply a Republican Party far more out of touch with reality than the one we saw in Congress in 2008 and one that would continue to get elected in the face of double-digit unemployment.

The second Great Depression mythologizers — including Geithner, New York Times columnist Tom Friedman and the editorial board of The Washington Post — assume they can say whatever they want and that people will accept it because they are important people whose conventional wisdom is rarely, if ever, challenged. They even managed to retain their authority after failing to see the economic threat posed by the housing bubble. The bottom line is that for these people, the goal was saving Wall Street — full stop. Whether the rest of the country suffered was beside the point.

As a result of the hysteria they promoted, they prevented the market from correcting this horrible source of waste and the upward redistribution of income that continues to act as an enormous drag on the economy. The fact that many of the promulgators of the second Great Depression tale had close ties to Wall Street may go a long way toward explaining their behavior.

Dean Baker is co-director of the Center for Economic and Policy Research and author, most recently, of The End of Loser Liberalism: Making Markets Progressive.

This column originally ran on Al Jazeera.

More articles by:

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

July 25, 2017
Paul Street
A Suggestion for Bernie: On Crimes Detectable and Not
David W. Pear
Venezuela on the Edge of Civil War
John Grant
Uruguay Tells US Drug War to Take a Hike
Charles Pierson
Like Climate Change? You’ll Love the Langevin Amendment
Linda Ford
Feminism Co-opted
Andrew Stewart
Any Regrets About Not Supporting Clinton Last Summer?
Aidan O'Brien
Painting the Irish Titanic Pink
Rob Seimetz
Attitudes Towards Pets vs Attitudes Towards the Natural World
Medea Benjamin
A Global Movement to Confront Drone Warfare
Norman Solomon
When Barbara Lee Doesn’t Speak for Me
William Hawes
What Divides America From the World (and Each Other)
Veteran Intelligence Professionals for Sanity
Was the “Russian Hack” an Inside Job?
Chandra Muzaffar
The Bilateral Relationship that Matters
Binoy Kampmark
John McCain: Cancer as Combatant
July 24, 2017
Patrick Cockburn
A Shameful Silence: Where is the Outrage Over the Slaughter of Civilians in Mosul?
Robert Hunziker
Extremely Nasty Climate Wake-Up
Ron Jacobs
Dylan and Woody: Goin’ Down the Road Feelin’ Bad
Dan Glazebrook
Quantitative Easing: the Most Opaque Transfer of Wealth in History
Ellen Brown
Saving Illinois: Getting More Bang for the State’s Bucks
Richard Hardigan
The Media is Misleading the Public on the Al-Asqa Mosque Situation
Matthew Stevenson
Travels in Trump’s America: Memphis, Little Rock, Fayetteville and Bentonville
Ruth Fowler
Fire at Grenfell
Ezra Kronfeld
The Rights of Sex Workers: Where is the Movement to Legalize Prostitution
Mark Weisbrot
What Venezuela Needs: Negotiation Not Regime Change
Binoy Kampmark
From Spicy to the Mooch: A Farewell to Sean Spicer
Wim Laven
Progress Report, Donald Trump: Failing
Weekend Edition
July 21, 2017
Friday - Sunday
Kevin Zeese
Green Party Growing Pains; Our Own Crisis of Democracy
Jeffrey St. Clair
Red State, Blue State; Green State, Deep State
Paul Street
“Inclusive Capitalism,” Nancy Pelosi, and the Dying Planet
Anthony DiMaggio
Higher Education Fallacies: What’s Behind Rising Conservative Distrust of Learning?
Andrew Levine
Why Republicans Won’t Dump Trump Anytime Soon
Michael Colby
Ben & Jerry’s Has No Clothes
Bruce Dixon
White Liberal Guilt, Black Opportunism and the Green Party
Edward Hunt
Killing Civilians in Iraq and Syria
Matthew Kovac
Is the Flint Water Crisis a Crime Against Humanity?
Mark Harris
The Revolutionary Imagination: Rosa for Our Times
David Rosen
America’s Five Sex Panics
Robert Fisk
Saudi Arabia: the Kingdom Whose Name We Dare Not Speak At All
Jack Heyman
Class War on the Waterfront: Longshore Workers Under Attack
Kim C. Domenico
Marginalize This:  Turning the Tables on Neoliberal Triumphalism
Brian Cloughley
Trying to Negotiate With the United States
John Laforge
Activists Challenge US Nukes in Germany; Occupy Bunker Deep Inside Nuclear Weapons Base
Jonathan Latham
The Biotech Industry is Taking Over the Regulation of GMOs From the Inside
Russell Mokhiber
DC Disciplinary Counsel Hamilton Fox Won’t Let Whistleblower Lawyer Lynne Bernabei Go
Ramzy Baroud
The Story Behind the Jerusalem Attack: How Trump and Netanyahu Pushed Palestinians to A Corner
FacebookTwitterGoogle+RedditEmail