As we get into the primary and general election season it is clear that U. S. citizens are a particularly ungrateful lot. Voters are mad as hell and not going to take it anymore.
They are angry that the economy remains sour, with unemployment persisting at more than 9 percent. Conditions are bad for businesses, and home values remain low, with many people owing more than their houses are worth. People don’t like enormous federal deficits or a burgeoning national debt. The general attitude is to throw the rascals out and vote in replacements who will bring about economic prosperity, smaller government, balanced budgets (preferably with lower taxes) and no more government bailouts of big corporations.
The widespread outrage reflects some collective amnesia about how we got to where we are now. The very policies that got us into trouble — easy credit, rising home ownership and housing prices, low taxes and persistent budget deficits — were highly popular while the bubble was inflating, despite widespread warnings that the course we were following was unsustainable.
Most important, however, the current epidemic of righteous anger ignores the fact that we could be in much worse shape. If things had gone differently in the fall of 2008, we could have had unemployment of 25 percent or 30 percent, not 10 percent. We could have fallen into a second Great Depression. Given the magnitude of the financial crisis that we created and the size of the asset bubble that we watched inflate, the resulting recession has been remarkable for its mildness and brevity.
And while no one seems willing to acknowledge this, much credit for the fact that we dodged a far larger bullet should be given to George W. Bush, who, in September and October of 2008, had the good sense to respond positively when his Treasury secretary, Henry Paulson, called for an unprecedented bailout of the U.S. financial sector. Given all that had gone before, over various decades, Congresses and presidential administrations, a massive financial intervention was precisely the right thing to do.
This is not to absolve the Bush administration for its own bad policies that contributed to the problem. But here the blame must be shared with the Clinton and Reagan administrations and that of Bush’s own father, as well as successive Congresses and a Federal Reserve that failed spectacularly both as a financial regulator and money supply manager.
Nor does this mean that the particular design and implementation of the Bush administration intervention — in particular its overly generous treatment of AIG’s counterparties and the magnitude of free money given to the 13 largest banks — was good policy. It was terrible policy, but better than doing nothing at all.
But on the key question, what government should have done when Lehman Brothers failed and it became apparent that AIG was in deep trouble, Paulson and his boss got it right. If the U.S. government did not act, the financial system would have crumbled and we would have been in a situation as bad as 1933 or even worse. It was George W. Bush’s finest hour.
Anyone who thinks that if we had let AIG fail we would be OK now betrays a lack of knowledge of economic history and of understanding about how market economies function, for ill as well as for good.
Market economies can do wonderful things for society. I have spent 30 years of my life trying to convince some 4,000 students of that important fact. But markets don’t always work perfectly, except in the dreams of naïve libertarians, and occasionally their failures are catastrophic. We looked catastrophe in the face two years ago and we should be grateful that we escaped it.
Now if you make the argument that we should have bitten the bullet and accepted a milder depression back then to avoid an even worse one at some point in the future, you have a coherent intellectual case, even though I don’t agree with it. But if you think we could have avoided any “bailout” and still done as well as we have in the intervening two years, you need to study economics and history a bit.
There is great disagreement among economists on the importance of various economic factors and policy errors that brought us to 2008. There is is similar disagreement within the discipline on the specifics of the bailout and on other economic policies since 2008. But on the fundamental question of whether the government should or should not have intervened to prevent a generalized financial collapse following the failure of Lehman Brothers, there is little dissent. It was the right thing to do.
Part of the anger in the U.S. populace right now stems from an unwillingness to recognize just how bad a situation we had gotten ourselves into.
Perhaps that is because such recognition might force us to acknowledge how our own votes in past elections, for candidates of both parties, contributed to the problem.
But if we don’t recognize it, the votes we cast this year are going to contribute to further problems down the road.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.