The three authors – Tim Geithner, Bob Bernanke & Hank Paulson represent Democrats, Republicans and career scholars/civil servants. They are the men more than any others who saved our economy and they tell their story very well.
Learning from history
The economic crash that started at the end of 2007 and ended early 2009 could have been a lot worse. The Great Depression started like that. Fortunately, this time some people had learned the lessons and the Treasury Dept, the Fed and even politicians did mostly the right things. The authors thought it useful to document some of what happened in hopes of making the lessons available for the next time we have a panic – and there will be a next time.
The authors use a few metaphors that make sense. They describe the spread of economic panic like an e-coli scare. There is some tainted meat or lettuce. Most is just fine, but people avoid all of the products, good and bad. As the panic spreads, it gets worse because unlike e-coli, which is a identifiable pathogen, financial markets depend on confidence & trust. When confidence & trust are lost, perfectly good securities can become toxic, leading to more loss of confidence.
Value is only what others are willing to pay
Nothing has intrinsic value. The labor-value of goods, i.e. something value depends on the work that went into it, makes intuitive sense, but it is a false concept. The only thing that gives anything value is what somebody else thinks it is worth. Housing was the basis of the collapse. People had confidence that home prices could go only in one direction – up. So, people bought more house than they could afford, assuming the value would grow, and they would make money. It seemed risk-free. They did make money for a long time. But your home did not get to be worth more unless somebody else is willing to pay more. In fact, the home we bought in 1997 should be worth less, since some things have worn out. Yet the value increased because people were willing to pay. When this stopped, the economy went down. The home that was “worth” $500,000 when you bought it, suddenly was worth half that. Even if you still owed $450,000.
The conflagration consumes good, bad and neutral
The other set of metaphors the authors use is fire. They use it in two related but separate ways that I think reflects Bernanke and Paulson. Bernanke talks about house fires. He gives the example of moral hazard. If a person smokes in bed and sets his house on fire, he may be blamed for the conflagration. But it doesn’t do any good to punish him by letting him burn, if your house will also catch fire. He used this metaphor to explain why we had to bail out some people who made bad, or even dishonest decisions.
Paulson is an environmentalist, who has exposure to prescribed fires and forest fires. His fire analogy is that of a wildfire. Whatever sparks the actual fire is less crucial than the presence of dry material ready to burn. Trying to identify the people or thing responsible for the ignition is a useless exercise, and trying to protect the only by stopping ignitions is worse than useless, since the task is impossible but might lead to complacency about address the kindling conditions.
Anyway, the fire was burning and destroying good as well as bad assets.
Bush & Obama did the right things but got little credit …
The authors describe the actions taken, much of it by the Fed and Treasury to shore up assets. They remind us how controversial all this was at the time, but our leaders showed courage. TARP (Trouble Assets Relief Program) was passed by a Democratically controlled congress and signed into law by President George W. Bush and they did this in the middle of an election campaign. And it was George W Bush who bailed out the auto industry. All this worked out. In fact, the government actually made money on these transactions.
… and a lot of blame from their own folks
Activists on both sides of the political spectrum hated the programs, however. People on the right didn’t like the idea of spending government money to bail out firms because they feared the expansion of government. People on the left didn’t like the government bailing out firms because they wanted more government and wanted to punish private firms. In the end, the more moderate middle saved the county.
The authors praise both the Bush and Obama Administrations for going against the power of their base. Bush embraced greater government. He also took many of the hard decisions in the lame-duck part of his presidency, sparing the Obama folks the opprobrium and the attacks they would have suffered from opponents opportunistically blaming the new guys.
The Obama folks, for their part allowed the Bush team the room they needed AND carried on similar policies when they took office. This is less surprising when you recall that Geithner, part of the triumvirate fighting the economic fire, became President Obama’s Treasury Secretary and Bob Bernanke stayed on at the Fed until 2014.
Obama did not follow the sirens’ song of his own base that wanted to make a clean break with Bush policies. In fact, this was a rare case of a nearly seamless transition, as 2/3 of the leadership team and most of the professionals remained on the job after the election.
This is how it is supposed to work. It is not how it worked at the start of the Great Depression and we got … the Great Depression. This time we got a severe downturn, but by summer of 2009 we were swinging back, even if that was not immediately evident to most Americans.
The future is uncertain.
The authors give advice on how deal with future panics. They warn that while legislation and regulations in place make the ignition of panics less likely, the mechanism to deal with them are less robust. They say it is like vaccinating people against deadly diseases, but at the same time closing hospitals.
It will happen again, and we will not be ready.
There will be other financial panics. By definition, they will come from unexpected sources, since we expect the expected ones and have covered those bases.
There is a kind of Stoical aspect to this book. Misfortunes will come. We will need to deal with them, but we cannot really say how. And there is an irony. Sometimes our preparations CAUSE the problem. We prepare for or regulate against one thing, and it creates incentives to do others. Making the system safer, for example, encourages more risk taking, making it more dangerous. We need to maintain a robust system, not one that is immune to all the troubles we can imagine, since the trouble of the future will be those beyond our imaginations.
I was encouraged by this book and comforted, despite its rather gloomy recognition that something will happen, and we will not be fully prepared. I was encouraged by the competence and commitment of our leaders. They don’t get much praise these days, but when they chips are down, they step up.
Another lesson. It takes human judgment and courage to deal with unexpected big problems. The routine rules are set up for routine situations. When we go beyond that, somebody must decide when to go beyond in response.