Protectionism is in vogue in the Trump era, but it’s been ten years since the single biggest act of protectionism in American history.
Under the guise of saving the U.S. economy, a bipartisan gang of powerful men decided to save a few failed or faltering banks. They posited a false dichotomy between “doing nothing” about the credit crisis rollicking markets, and saving the big banks.
You could call it cronyism if you want. After all, Ben Bernanke and Tim Geithner have both cashed out to financial institutions. Barack Obama fundraiser Warren Buffett made billions off his investment in Goldman Sachs based on his informed assumption the taxpayers would bail Goldman out.
But there are better words than cronyism for the bailouts of the late-Bush and early-Obama era. Protectionism is one. The power players—Geithner in particular—were set not just on propping up the financial system, but on propping up the current institutions. To give these public servants the benefit of the doubt, they believed that America’s economy needed Goldman, Bank of America, Citigroup, JP Morgan, and Wells Fargo, and needed them to be at least as big as they were before the crisis.
The stated reasons for government intervention were twofold: to prevent a disorderly fire sale of financial assets, which could cause a total market collapse; and to make sure banks kept lending money.
The latter didn’t happen. On October 12, 2008, Bernanke, Geithner, Paulson, and friends pumped $125 billion into nine big banks, charging them cheap rates. The banks did not lend that money back out to small businesses and homebuyers. They used the cash to shore up their weak positions.
And on the score of preventing a fire sale of assets held by the banks? There are ways that government can do that without making it a point to save the banks. Bankruptcy often involves winding down failed firms in a manner that minimizes the losses taken by creditors and counterparties. It can be structured so as to prevent a disorderly liquidation.
Citigroup, in particular, was a failed bank. It was, coincidentally, also the bank where Geithner’s mentor, Robert Rubin, had been an executive. In fact, in 2007, Citigroup investor Sanford Weill reportedly tried to talk Geithner into becoming Citi’s CEO.
Geithner and crew could have reduced the moral hazard and moral outrage of TARP had they wound down Citigroup. But Geithner wanted Citigroup to keep existing. It was pinstripe protectionism.
Geithner once in a while would talk as if some TARP programs were for helping homeowners keep their homes, but in private, Geithner admitted his goal was to “foam the runway” for the banks—that is, to save them on their crash landings.
“The simple truth,” wrote Neil Barofsky, the special inspector general for TARP, “is that Geithner and Treasury chose to never treat the foreclosure crisis, or their promises to Congress to help home owners, with the seriousness and resolve that they applied to rescuing the banks.”
Read insider accounts from Barofsky or FDIC Chairwoman Sheila Bair, and you can see some of the decisions made to save the big guys. First off, that October 12 injection of $125 billion into the big banks had nothing to do with orderly liquidation and everything to do with propping up the banks.
Of another TARP program, the Public Private Investment Partnership, Barofsky wrote “Although it was going to be funded overwhelmingly with taxpayer dollars, PPIP had been designed by Wall Street, for Wall Street.”
Barofsky tells another story of his effort to audit the TARP lending, and the Obama administration shooting him down. Specifically it was Peter Orszag’s Office of Management and Budget. Orszag left the administration for Citigroup.
At nearly every turn, the bailout barons acted mostly to save the failed or wounded banks rather than to focus narrowly on preserving economic stability.
In an extraordinary intervention like the Great Wall Street Bailouts, the action should have been as modest and narrowly tailored to the threats as possible.
The Bush and Obama teams never placed conditions on the exit from TARP. They could have required the big banks to get smaller, using TARP to break up the big banks. They could have wound down Citi. They didn’t do that because that would have defeated their purpose.
An economic system where the big guys are never allowed to fail precisely because they are big is not a just system. When you look at the revolving door actions of these guys—Rubin, Geithner, Bernanke, Orszag, and all the others—the unfairness is more obvious.
That glaring injustice gave us the Tea Party, Occupy Wall Street, Donald Trump, the Resistance, and the bubbling anger over our politics today. But even without examining these reactions to the bailout barons’ actions, the injustice of the bailouts was harmful because injustice is always harmful.
It could have been done differently. It could have been done better. But the men at the scene in 2008 and 2009 couldn’t give up on the old system, where a few big guys held so much of the power.
