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.

January 17, 2018
Seiji Yamada
Prevention is the Only Solution: a Hiroshima Native’s View of Nuclear Weapons
Chris Welzenbach
Force of Evil: Abraham Polonsky and Anti-Capitalist Noir
Thomas Klikauer
The Business of Bullshit
Howard Lisnoff
The Atomized and Siloed U.S. Left
Martha Rosenberg
How Big Pharma Infiltrated the Boston Museum of Science
George Wuerthner
The Collaboration Trap
David Swanson
Removing Trump Will Require New Activists
Michael McKinley
Australia and the Wars of the Alliance: United States Strategy
Binoy Kampmark
Macron in China
Cesar Chelala
The Distractor-in-Chief
Ted Rall
Why Trump is Right About Newspaper Libel Laws
Mary Serumaga
Corruption in Uganda: Minister Sam Kutesa and Company May Yet Survive Their Latest Scandal
January 16, 2018
Mark Schuller
What is a “Shithole Country” and Why is Trump So Obsessed With Haiti?
Paul Street
Notes From a “Shithole” Superpower
Louisa Willcox
Keeper of the Flame for Wilderness: Stewart “Brandy” Brandborg
Mike Whitney
Trump’s Sinister Plan to Kill the Iranian “Nukes” Deal
Franklin Lamb
Kafkaesque Impediments to Challenging Iran’s Theocracy
Norman Solomon
Why Senator Cardin is a Fitting Opponent for Chelsea Manning
Fred Gardner
GI Coffeehouses Recalled: a Compliment From General Westmoreland
Brian Terrell
Solidarity from Central Cellblock to Guantanamo
Don Fitz
Bondage Scandal: Looking Beneath the Surface
Rob Seimetz
#Resist Co-opting “Shithole”
Ted Rall
Trump Isn’t Unique
January 15, 2018
Rob Urie
Democrats and the End(s) of Politics
Paul Tritschler
Killing Floor: the Business of Animal Slaughter
Mike Garrity
In Targeting the Lynx, the Trump Administration Defies Facts, Law, and Science Once Again
Thomas Hon Wing Polin
Hong Kong Politics: a Never-Ending Farce
Uri Avnery
Bibi’s Son (Or Three Men in a Car)
Dave Lindorff
Yesterday’s ‘Shithole Countries’ Can Become Classy Places Donald, and Vice Versa
Jeff Mackler
Lesser Evil Politics in Alabama
Jonah Raskin
Typewriters Still Smoking? An Interview with Underground Press Maven John Campbell McMillan
Jose-Antonio Orosco
Trump’s Comments Recall a Racist Past in Immigration Policy
David Macaray
Everything Seems to Be Going South
Kathy Kelly
41 Hearts Beating in Guantanamo
Weekend Edition
January 12, 2018
Friday - Sunday
George Burchett
Wormwood and a Shocking Secret of War: How Errol Morris Vindicated My Father, Wilfred Burchett
Roberto J. González
Starting Them Young: Is Facebook Hooking Children on Social Media?
Jeffrey St. Clair
Between the Null and the Void
Andrew Levine
Trump After Bannon: What Next?
John Davis
Mud-Slide
Ajamu Baraka
The Responsibility to Protect the World … from the United States
Robert Hunziker
Global Warming Stirs the Methane Monster
Paul Street
Lazy Liberals and “the Trump Effect”
Carmen Rodriguez
Trump’s Attack on Salvadoran Migrants
Mike Whitney
Oprah for President, Really?
Francisco Cabanillas
The Hurricane After Maria
FacebookTwitterGoogle+RedditEmail