Often when people get mad as hell, they are mad at the right people for the wrong reasons.
That is the case with much of the widespread fury directed at Treasury Secretary Tim Geithner and Fed Chair Ben Bernanke over various ‘bailouts’ of large financial firms over the past 20 months. They deserve reproach for the roles they played, along with many other people, in getting us into the economic debacle.
But people should not resent the emergency decisions they made from March through October 2008 in desperate efforts to stave off disaster.
The problem is that our economic situation is complex and poorly understood by the public. We have not even approached a full-fledged financial system meltdown for more than a century, although things did get bad between 1929 and 1933. So that peril we faced 14 months ago is poorly appreciated.
People do understand the government, either as the U.S. Treasury or the Federal Reserve, putting hundreds of billions of dollars into firms like AIG, Fannie Mae, Freddie Mac, Bear Stearns and so forth. The general impression is that taxpayer dollars benefited only an effete corps of rich, impudent stockholders, speculators and overpaid CEOs.
Meanwhile, millions of people are out of work, losing their homes and getting monthly statements showing shrunken retirement savings. Federal programs to foster mortgage restructuring don’t seem to make much of a dent in a large backlog of households facing default and, outside of unemployment benefits, little help seems to reach those out of work.
It doesn’t help to point out that the shareholders in many of the recipient firms lost all or nearly all their money or that executives, traders and many other employees of Bear Stearns and Lehman Brothers lost their jobs and pension plans. This only makes it seem like the money was wasted.
The problem stems from an old phenomenon in U.S. history, the belief in “American exceptionalism.” Dating back to Puritan John Winthrop’s description of the Massachusetts colony as “a city upon a hill” that the rest of the world would look to as an example, American exceptionalism refers to a belief that our country is somehow different from all others, superior in virtues and morals, and that it is somehow destined to never fail as other countries might. Among other things, the United States will never lose an important war or suffer a financial sector collapse.
I consider myself a patriot and put in 22 years of active and reserve Army service because I love our country. But the belief that our country is unique and forever immunized against disaster is dangerous. There are plenty of historical examples of nations that suffered a cascade of failing financial institutions that brought on depressions with unemployment in the 25 percent to 35 percent range instead of 10 percent.
Yet even to voice the phrase “we stood at the edge of a financial abyss” invites being dismissed as a cartoon character in a robe carrying a sign warning, “The world is coming to an end.” There is no way to prove that what did not happen might have. The fact that we pulled ourselves back from the precipice with the emergency measures now reviled leads many to think it was all a false alarm.
It was not.
This is not to say that the efforts last year to stop the collapse of the financial system were well conceived or well executed. Yes, the Bear Stearns stockholders got too much money. Yes, JPMorganChase got too much protection against bad assets. Yes, firms owed money by AIG should have been subjected to a “haircut” instead of getting 100 cents on the dollar.
These interventions were not good policy moves. They were bad, and they engendered problems that will take years to sort out. But all of the alternatives were worse, far worse.
These “bailouts” did benefit the American public as a whole. If they had not been implemented, toppling financial dominos would have thrown us into a recession involving far greater pain and far greater loss of income or wealth than we have now. They were not just a pretext to transfer public funds to a dishonest cabal.
The important lesson for society is that we should not get ourselves into situations where we stand at the edge of an abyss. But the roots of that story are deep and the actors myriad. They include Geithner and Bernanke together with Alan Greenspan, Christopher Cox, Robert Rubin, Larry Summers, Andrew Cuomo, Phil Gramm and dozens of other players.
They ultimately involve a U.S. electorate that loves self-delusion. But that is all too complex for many. It is easier to rail against the “bailouts.”
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.