Big lesson from the financial crisis: Wall Street gets what it wants

Dean Baker

Seven years ago this week, the world’s financial system was teetering on the brink of collapse. The bankruptcy of Lehman Brothers had completely shaken confidence in the banking industry. First, no one could trust the banks’ books; no one knew how much bad debt banks were concealing.

Second, the too big to fail insurance seemed not to exist. After all, if Lehman was not too big to fail, who was?

At that point, policy could have gone two directions. One direction would have been to take advantage of this moment and let the market work its magic. The bloated financial structure that had developed over the last three decades was collapsing from its own excesses. The industry would have paid the price for the issuing and packaging of hundreds of billions of dollars of fraudulent loans, as they finally ran out of suckers to buy the junk. The other route was to have the government rush to the rescue and keep Wall Street largely intact, involving an enormous amount of below market interest rate loans from Fed and Treasury and an even larger amount of loan guarantees.

As we all know, we went the route of the bailout. When the House of Representatives responded to an outcry from constituents across the political spectrum and voted down the original bailout, the Wall Street gang doubled down. They endlessly pushed the line that we would face another Great Depression if the US Congress didn’t rescue Wall Street. Leading news outlets like the NY Times, National Public Radio, and the PBS News Hour were filled with stories about how we would be condemned to a decade of double digit unemployment if the government didn’t bailout Citigroup and Goldman Sachs.

The implication was that we somehow had forgotten how to do fiscal policy – the government would not know how to spend money – if the Wall Street banks went under. The Fed Board Chair Ben Bernanke, Treasury Secretary Hank Paulson, and Timothy Geithner (then head of the NY Fed), led the charge.

Bernanke apparently had no problem warning of a second Great Depression even though just a few years earlier he had mocked people who questioned the federal government’s ability to generate demand by pointing out that it “…has a technology, called a printing press…”

There is no doubt that the initial downturn would have been worse if the banks were allowed to fail. But it is difficult to envision the force that would prevent rebooting the economy and getting it back up to its capacity without the albatross of a bloated financial sector. Would the ghost of Citigroup prevent members of the US Congress from supporting stimulus, something even Republicans had done in large numbers in February of 2008?

The story of the decade of double-digit unemployment from which we were supposedly spared by the bailout depends on Congress sitting on its hands and doing nothing through the worst slump in seventy years. This is a political prediction, not an issue of economics. And it is a political predict- ion that has absolutely no basis in modern history.

Seven years after the Lehman collapse, the country is still far from recovering. We are still down between 3 million to 4 million jobs from the trend growth path. For most workers, real wages still have not recovered to their pre-recession level. And millions of families have lost their homes due to either or both the bad timing of having bought at bubble- inflated prices or having taken out a high-risk loan.

Meanwhile, Wall Street is doing just fine. The big banks are bigger than ever. And the folks who lead the bailout, like Timothy Geithner, who as President Obama’s Treasury Secretary made “no more Lehmans” his motto, are making multi-million dollar salaries.

And of course no Wall Street-types were prosecuted for issuing or passing on fraudulent mortgages. In short, Wall Street gets what it wants, the people who help along the way get their rewards, and the rest of us…well, life is tough.

Source: Real World Econ Rev, 18 Sept 2015 https://rwer.wordpress.com/2015/09/18/biggest-lesson-from-financial-crisis-wall-street-gets-what-it-wants/

Dr Dean Baker is co-founder of the US Center for Economic and Policy Research, with Mark Weisbrot. He previously was a senior economist at the Economic Policy Institute and an assistant professor of economics at Bucknell University.