Editor's note: this story has been updated regarding Sandy Lewis.
When the histories of the 2008 financial crisis and its aftermath are written Presidents George W. Bush and Barack Obama certainly will have featured roles. So will the Clinton admnistration, which set a course of financial deregulation, and former Federal Reserve Chair Alan Greenspan, an Ayn Rand disciple, whose monetary policies fed a Wall Street and banking speculative bubble. The central players, of course, were the greed-driven Masters of the Universe who invented and traded financial derivatives they themselves did not understand.
But Federal Reserve Chair Ben Bernanke may emerge as the man who made the greatest positive difference. He took decisive action early in the crisis and last week took the unprecented step of announcing that the Fed would buy $40 billion in mortgage-backed securities every month henceforth until the job market improves.
Millions of Americans lost large percentages of their net worth in the crash. Investment firms, businesses, and banks went under. Many families lost their homes. The domestic economic recovery since the crash is the slowest and shallowest in the wake of any post-Great Depression downturn. The country now must cope with uprecedented trillions in debt which have mortgaged our futures. If you worked hard, did the right things, and played by the rules over a lifetime, you probably came up a loser. My own generation, and the early boomers now entering retirement, mostly have no way to recoup their losses, for their earning years are behind them.
Where were the standup leaders willing to risk their reputations to stop the carnage? You can go through a long list but, finally, you will find that Bernanke was and is the only major player who threw himself into the breech when he saw that others would not. He, almost alone, has kept the U.S. financial system and economy on its feet while other national leaders — the Wall Street guys responsible for the speculation and burst bubble, the Executive branch, and Congress — were reluctant to take any action that hurt their own near-term interests.
Many economists say the impact of the ongoing Fed purchases, announced last week, will be be relatively small. Interest rates already are effectively at zero. The great fear is that the Fed is setting the stage for a down-the-road outbreak of calamitous inflation. You can't print that much money monthly — in the absence of responsible government taxing and fiscal policies — without creating that long-term outcome. Bernanke's response, in effect: In the long run, we are all dead. In the short and medium run, we've got to get our economy moving again.
Let's step back a bit. When Obama took office, he was largely unschooled in finance and economics. He was generally unacquainted with the candidates for senior financial/economic positions in his administration. He chose as his principal White House economic adviser Larry Summers, a former Clinton Treasury Secretary and Harvard president mainly known for being the only man in history (according to his judgment) never to have made a mistake.
The main candidates for Treasury Secretary were Paul Volcker, a universally respected Fed chairman who had tamed inflation at the end of the Carter era, and Tim Geithner, Summers' deputy in the Clinton Treasury who subsequently had run the New York Fed during the 2008 crisis (and was thought dangerously cozy with the Wall Street operators who had caused it). "Little Timmy," as he was derisively characterized by his critics of the time, was a safe, non-boat-rocking choice who could be expected to follow Summers' lead. Volcker was named a "senior advisor" but, not surprisingly, his advice was not sought. Obama appointed a revolving-door series of Council of Economic Advisor chairs who were not regarded as heavyweights by their peers.
The main Wall Street/bank TARP bailout was configured in the closing days of the Bush administration and essentially appropriated by the incoming Obama administration. It channeled huge sums of taxpayer dollars to "too big to fail" financial institutions whose collapse could have domino effects. A mix of government tax-cut and spending measures totaling nearly $1 trillion were instituted as a stimulus program to jump start the real economy.
Trouble was, Obama mainly delegated the formulation of the stimulus package to Democratic congressional committee chairs, who used much of it to pay for non-stimulating pork-barrel stuff which created neither jobs nor economic growth. Special programs were designed to bailout the auto and mortgage industries.
Depending on your viewpoint, you can praise or fault these programs. Obama, weighing the advice he was given, no doubt opted for action over inaction and that is hard to fault.
The wild card, in the midst of this, was Obama's introduction of a major legislative proposal to remake the U.S. health system. Obama says, now, that he did not fully recognize the seriousness at the time of the country's financial/economic plight, although
he will not concede that the health plan's introduction might have been premature.
In any case, the health legislation not only was controversial for its content; it moved the central financial/economic recovery issue to second-rank status. A good deal of the following year was devoted to proving that the health plan would not increase federal deficits. In the end, some bookkeeping devices were found and about $800 billion was arbitrarily cut from Medicare spending to make the health plan appear "revenue neutral."
The plan's public unpopularity was such that, in 2010, it was a principal contributor to the loss of 63 Democratic House seats, most held by moderates. This gave control of the House to Republicans and reduced sharply the ranks of moderate, consensus-seeking legislators in both political parties. Gridlock has prevailed since.
Such was environment in which Benrnanke found himself. He was a student in his academic career of the Great Depression. He believed that strong, early action was imperative early in 2009 and was determined that the Fed should provide it. Part ot his program involved "quantitative easing" — that is, the same money-printing program that has now been reinstated to fight slow job creation.
But he never imagined, at the outset, that White House and Congress would remain hopelessly gridlocked and unable to undertake complementary taxing and fiscal actions. Just before announcing the new Fed program, Bernanke again last week called strongly for White House-congressional action on the Dec. 31 "fiscal cliff" tax increases and spending cuts which, unless forestalled, are estimated to cut economic growth to zero in 2013. No pre-Dec. 31 action should be expected.
It is certainly true that, if the Fed keeps pumping $40 billion monthly into the system, while interest rates already are effectively at zero, we'll have a later outbreak of Big Mama inflation. But, one hopes, the White House and Congress will not continue to do little and blame each other during the many months ahead.
It should be noted, that the European Central Bank finds itself in a similar position in the European Union, pushing fresh money into the financial system because member governments lack the political will to take necessary taxing and spending decisions.
Denounce him if you will, but Bernanke remains the only player in the financial-policy power circle who continues to show guts and initiative.
Meanwhile, along comes a timely new book, Who Stole the American Dream, by Hedrick Smith, a former New York Times and PBS correspondent whom I have known and whose work I have respected for years. It just received a glowing review by Seattle Times economic columnist Jon Talton.
After long independent research, Smith concludes that present middle-class (or, more accurately, middle-income) stagnation
has taken hold because, over the past 40 years, business lobbying and influence have increased greatly in Washington, D.C. It's all resulted, Smith writes, in a general business-against-the-average-guy policy framework in national policymaking.
Business lobbying certainly has increased in the capital over that time. Yet teacher and public-employee unions are at least equally influential. And the general business community has never had a belief in recent years that profits should come from exploitation of workers and consumers. Mostly it wants policies creating a growing pie in which incomes and overall demand will rise and a climate that is not regarded as "anti-business." Democrats, after all, have held either the White House or at least one house of Congress during most of the period. Business influence, if all that important and sinister, would not have allowed those Democratic victories to happen.
If they're looking for real villains, I'd refer Smith and Talton to financial-sector overlords who have conducted themselves in the same years with unparalleled greed and public-be-damned mindsets. It was this sector, remember, that was President Obama's single greatest source of campaign contributions in 2008 (while John McCain's came from defense contractors).
To get real insight into the thinking of these financial overlords, read The New York Times profile of Sandy Lewis, a truth-telling, whistleblowing financial wizard. If you're looking for villains, look no further than the senior banking and investment executives who still, today, admit no wrong, are still in charge, and demand multimillion-dollar compensation packages for themselves. Read Smith's book but also pay attention to what Lewis has to say. He's got it nailed.