It’s the final post of The Great Read-cession! Just shut up and read!
What should the government have done differently?
This is a very loaded question. When I first started reading about the issue, while it was going on in 2008-09, I got the sense that this was really a rare case where the government was not at fault. This wasn’t like Watergate or Iraq, where people in power abused that power—it was just a case of private companies going wrong. But it becomes a lot trickier when you look closely at how intermeshed the government and the financial world actually are.
A lot of the conversation about the government’s role in the collapse has surrounded the issue of deregulation, specifically the issue of Glass-Steagall. On the other end of the political spectrum, Republicans have focused on the GSEs as responsible for the decline in lending standards. But both of these issues seem more like scapegoats than real sources of the problem.
As most of the data makes clear, the Community Reinvestment Act of 1992, which directed Fannie and Freddie to purchase more mortgages from certain minority groups, had very little to do with the subprime boom and decreased lending standards. Fannie and Freddie bonds defaulted at a lower rate than those sold to wholly private firms, and there was clear market demand for housing securities absent any government pressure.
The repeal of Glass-Steagall, on the other hand, at least bears some of the blame for allowing companies like Citigroup and Bank of America to get so big. While the law had, since 1933, separated the activities of commercial and investment banks, its repeal allowed the biggest commercial banks in the country to expand their proprietary trading.
With that said, the repeal of Glass-Steagall was mostly symbolic—banking regulators had been allowing more trading at commercial banks for decades before its official repeal in 1999. And the most notable failures of the financial crisis—Lehman, Bear, AIG, Fannie, Freddie—would not have been affected at all by the law. Continue reading
We’re wrapping up the financial crisis book reviews with today’s look at two books on the reform efforts that followed the crash of 2008.
Confidence Men: Wall Street, Washington, and the Education of a President
by Ron Suskind, 2011
The last two books I read focused mainly on the government’s response to the crisis, as opposed to the crisis itself. Confidence Men, which got a lot of attention when it came out for its revelations of in-fighting in the Obama Administration, showcases Obama’s response to the financial crisis, both as a candidate and as a new president.
As a candidate, of course, the financial crisis and the housing bubble were a boon to Obama. The sluggish economy of President Bush’s last few years helped Obama’s message of change resonate with the electorate, and John McCain’s incoherent response to the crisis—including his assertion that “the fundamentals of our economy are strong” on the day Lehman failed—helped doom his campaign.
But once Obama was elected, the crisis became a tremendous albatross. One problem was that while many within the campaign anticipated a crisis of some kind, nobody really expected it to come so fast and be so severe. Suskind details a scene from early in Obama’s campaign—August of 2007—in which Obama’s economic advisers warn him that, as president, he will need to respond to a housing crisis. But they estimated that the crisis would hit in “year two” of an Obama presidency, and it would cost about two million jobs. In reality, of course, it came before Election Day, and ultimately cost about eight million jobs. Continue reading
Welcome to Part IV of our eleven-part breakdown of the books of the financial crisis. Having trouble keeping up? Then check out this page for all previous and future posts in the series.
On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
by Henry Paulson 2010
The unifying element of the first four books was pessimism: Whether it was Ritholtz’s scorn for those in power, Morgenson’s search for someone to blame, Lewis’s tragic tale, or Sorkin’s narrative of disaster, all four books had decidedly bleak outlooks on the events. Since there is only so much despair one person can read about, I wanted to read the account of someone who would be sympathetic to the policy-makers and CEOs who everyone else blamed.
Henry Paulson was perfect. If the financial panic of 2008 has a face, it’s Paulson’s. As Treasury Secretary during the collapse, he was the one who told Congress of the dangers of Fannie and Freddie (in his infamous squirt gun analogy), who proposed TARP, and who ultimately dispensed the bailouts. And unlike the other figures prominently involved—Geithner, Bernanke—he faded from public view almost immediately after the disaster passed.
Reading Paulson’s book, though, it is hard to dislike him. His prose is straightforward and he comes across as an upstanding, diligent worker with integrity. He’s honest, but polite and gracious to a fault—despite presiding over what many would describe as a complete disaster, he has nothing but kind words for almost everyone involved.* He worked for Presidents Nixon and Bush—two of the least popular Presidents of the last 50 years, if not ever—but says nothing negative about either. He clashed with another prominent public figure, Jon Corzine, for the top spot at Goldman Sachs, but all he says about that is “frankly, the pairing was never right.” Continue reading
We’re up to Part III of John’s breakdown of the books of the financial crisis. Click here for Part I, and here for Part II.
Reckless Endangerment: How Outsized Ambition, Greed, And Corruption Led to Economic Armageddon
by Gretchen Morgenson and Joshua Rosner, 2010
Reckless Endangerment is one of a specific subgenre of financial crisis literature, which might be called the “Blame X” genre. Human nature being what it is, there is a lot of demand for books that find someone or something to blame for the whole ordeal.
Reckless Endangerment’s targets are Fannie Mae and Freddie Mac, the government-sponsored entities (GSEs hereafter) designed to aid the housing market, and specifically Jim A. Johnson, the CEO who brought Fannie Mae to new heights (or depths, depending on your perspective). Morgenson and Rosner lay almost all the blame for the financial crisis on Johnson’s reckless efforts to expand Fannie’s market share: “A Pied Piper of the financial sector, Johnson led both the private and public sectors down a path that led directly to the eventual crisis of 2008.”
The GSEs are frequent targets of this kind of criticism, and for good reason: The bailouts of Fannie Mae and Freddie Mac created by far the biggest losses of all the government bailouts of 2008-09: The costs have already exceeded $180 billion and could reach $363 billion (conversely, Treasury claims to have actually profited on TARP*). And they were terribly run companies before that: In 2004, they were charged with massive accounting irregularities that led to the resignation of their CEO, and several executives were implicated in the “Friends of Angelo” bribery scandal.
*Though those claims should be taken with a grain of salt, as we’ll see later.
Morgenson’s book does a thorough job of portraying the extent and nature of corruption that was almost inherent to the GSEs. Particularly appalling is the incestuous relationship between the companies and the government. The entire concept of a “government-sponsored enterprise” sounds almost Orwellian: The institutions were created as government agencies* during the New Deal, but Lyndon Johnson partially privatized them, in what was essentially an accounting gimmick, when costs related to the Vietnam War made government expenditures look bad. Continue reading