Bailouts, Necessary or Not?

President Bush, the Younger, said they were absolutely necessary. Candidate John McCain supported them. After President Obama took office in 2009 his Secretary of the Treasury, Timothy Geithner, defended bailouts to help rid banks of up to $1 trillion in toxic assets that were described as a roadblock to economic recovery. Fareed Zakaria wrote in the September 19, 2010, issue of Newsweek that in October 2008, a month after the collapse of Lehman Brothers, "the U.S. government made a series of massive moves to restore stability to the financial system. And it's clear that those actions saved the American – and thus the global – economy from total collapse. Zakaria adds:

Consider the facts. After the fall of Lehman, credit froze in the U.S. economy. Banks stopped lending to anyone, even Fortune 500 companies with gold-plated credit. People couldn’t get consumer and car loans at any price, businesses couldn’t get short-term loans to meet payroll. Private-sector borrowing—the lifeblood of modern economies—fell from 15 percent of GDP in late 2007 to minus 1 percent of GDP in late 2008.

Dean Stockman, President Reagan's budget director at age 34, has a different take on what happened. He told Zakaria on a November 28 broadcast:

The panic that occurred in September, 2008 was not in main street America. It wasn't businesses about ready to close their doors because they didn't have cash to meet payroll. That is all urban legend. It's mythology. The panic that was going on was in the fifth floor of the Treasury Building. It was in the Eccles Building where the Federal Reserve and Bernanke reside, and they created the panic. They stirred up Congress. They were so concerned about where the stock price of Morgan Stanley and Goldman was that they didn't look at the bigger picture.

If a couple more banks had gone under, they would have gone under. If the Golden stock had gone down to $10 and stayed there for a couple of years, it wouldn't have been the end of the world. But when we did that, that was the waterloo for fiscal policy because how can you ever tell a congressman from Alabama to cut cotton subsidies after you have bailed out every one of the major banks and not only bailed them out, but within a year they were back to a picture of rosy pink health and paying bonuses which they will this year of $144 billion, nearly the highest in history.

And I'll never forgive the Bush administration and Paulson for basically destroying the last vestige of fiscal responsibility that we had in the Republican Party. After that, I don't know how we ever make the tough choices.

This is a subject historians will be wrestling with in the decades ahead.