The Great Read-cession, Part XI

It’s the final post of The Great Read-cession! Just shut up and read!

The End…

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.

The Great Read-cession, Part IX

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.