First Responders: Inside the U.S. Strategy for Fighting the 2007–2009 Global Financial Crisis
edited by Ben S. Bernanke, Timothy F. Geithner, and Henry M. Paulson, Jr., with J. Nellie Liang
Yale University Press, $37.50 (cloth)

More than a decade after the financial crises of 2008, the shortcomings of the government’s response have become painfully clear.

This clarity has unfortunately not been aided by the extensive writings of the three people George W. Bush and Barack Obama charged with putting the fire out: Henry Paulson (Bush’s Treasury secretary), Timothy Geithner (Bush’s New York Fed CEO turned Obama’s Treasury secretary), and Ben Bernanke (chairman of the Federal Reserve for both Bush and Obama). In no other U.S. financial crisis did two successive administrations of opposing parties work together so harmoniously, aiming toward the same goal with similar means. From the moment of the Lehman Brothers bankruptcy on September 15, 2008, to Obama’s inauguration on January 20, 2009, the two major parties—one of whose leaders won office on the slogan of hope and change—sought essentially the same legislation, backed the same actions by the executive branch, and even relied on the same person, Geithner, to restore Wall Street’s primacy in shaping investment and wealth allocation.

The response to the 2008 financial crisis has threatened the survival of democracy—not only in the United States, but around the world.

After calm returned to the panic-stricken financial markets—the summer of 2009 in the United States, later in Europe—each of these figures wrote separate memoirs of the experience; they also jointly authored a book, Firefighters (which I reviewed in these pages last year), and have given mutually supportive interviews. I do not think U.S. history includes any similar effort to explain, and rationalize, decisions of such magnitude. (More typically, different actors provide uncoordinated and often clashing accounts of their conduct in crises.) The latest contribution in this direction is First Responders, a compilation of eighteen essays edited by the trio, who in turn wrote one essay and recruited thirty-two of their aides to write the others.

Overall, the editors claim qualified success. “The crisis paralyzed global credit, ravaged global finance, and plunged the American economy into the most painful recession since the 1930s,” they write. “But it did not result in a second Depression.” The three admit that their response was “very unpopular” but conclude that is because “the government entered the crisis with inadequate powers.” The government still lacks essential powers, they contend, but they say they assembled this book because they “owed the crisis fighters of the future the manual that we were never given.” We are witnessing in these books a unique try, in George Orwell’s phrase, to control the future by controlling the past. The central message from the trio is this: in the next time of trouble, do what we did.

The problem is that the first responders have not fully reckoned—here or elsewhere—with the implications of their actions. Their inadequate response undercut Obama’s major legislative reforms, leaving policymakers with no commonly understood economic approach to decision making. It represented a triumph of expedience and elitism over economic justice. It gave a huge boost to China in the competitive contest among nations. And it has threatened the survival of democracy not only in the United States, but around the world. Not accepting their own history in these terms, the editors are too confident in their prescriptions.

• • •

Following the introductory essay are seventeen chapters describing the full gamut of government programs—in the Department of the Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and within the executive branch—that eventually restored calm and confidence to Wall Street, restored liquidity to global finance, and helped get investment and job hiring going again. These accounts are dry but candid, and in many ways more revealing than the polished joint narratives of the three editors. All told, they issue a total of eighty-five tactical lessons, but we can group them into four overarching lessons:

  1. Act before crisis. Diagnose the financial and real economies, anticipate problems, intervene with all possible government authority before the difficulties become critical.
  2. Act with overwhelming force during crisis. Spend public money, invest public dollars, provide government guarantees of debt in whatever amount ends the financial panic and puts the economy on a good track. Retain flexibility to keep spending, etc. as needed if the crisis flares or economy slips again.
  3. Explain. Inform public and Congress about the situation, the response, the reasons for decisions.
  4. Be amoral; try to recoup public investment. Do not pursue social goals while ending bank runs. Do not worry about unjust enrichment of some. Do try to get a return of capital for the Treasury.

These lessons are based on the triumphalist claim about avoiding a second Depression—the specter they also conjured up at the time of their decision making. Soon after being named as Obama’s pick for treasury secretary after the 2008 election, Geithner informed the president-elect that his “accomplishment is going to be preventing a second Great Depression.” But there were three terrible aspects of the Great Depression that the first responders did not avoid, at least not completely, and two they should have aspired to replicate but did not.

We are witnessing in these books a unique try, in George Orwell’s phrase, to control the future by controlling the past.

First, if they meant to stop unemployment from reaching double digits, as it did for most of the 1930s and did again in the Reagan recessions of the early 1980s, then they did not avoid that calamity. To be sure, unemployment did not reach the peak of 25 percent it hit in 1933, but that prospect was not plausible after the crisis in 2008. Government stabilizers—the anodyne term for the safety net measures of unemployment insurance and Social Security—as well as the vast expansion of the federal role in the economy since World War II greatly mitigated the impact of recession on consumer demand, and thus reduced job loss.

Second, if they meant to avoid panic-driven bank runs, their efforts in this respect lasted a long time, stretching at least from early 2008 to mid-summer 2009 in the United States, and from 2007 to 2012 in Europe. By contrast, Franklin Roosevelt stopped the bank runs of March 1933 within days of his inauguration.

Third, if one of their goals was to show the world the merits of their response to the crisis—a reconstitution of the peculiar synthesis of democracy and capitalism in the United States—then they were not totally successful. Neither Roosevelt nor these first responders were able to stem the global surge of fascism and communism as dangerous alternative governing models.

Moreover, two aspects of Roosevelt’s response to the Great Depression were not replicated but should have been. For one thing, both the Bush and Obama administrations refused to punish what in the 1930s were labeled “banksters”; instead they restored Wall Street elites quickly to their preeminent role in investing and allocating wealth. By contrast, in 1933–34 Roosevelt passed moral—and in some cases, criminal—judgment against financiers. His administration also initiated an era of public investment that exercised a countervailing power of capital allocation to create public goods, from the Triborough Bridge to the Tennessee Valley Authority.

Most important, unlike Roosevelt, Obama failed to create a grand political coalition that would give his party the capability to address massive problems requiring collective action—including, at minimum, affordable health care for all and a rapid shift from carbon to clean power as the underpinning of the economy.

To a significant degree, the lessons proffered by the lieutenants can be read as a subtle but telling critique of the actions of their generals. The most salient example is that Paulson followed neither the First nor the Third Lesson. Early in 2008 he diagnosed the financial crisis with reasonable accuracy. But he intervened only in part, then failed to summon all government authority, and ultimately looked on as the very thing he knew would trigger untold disaster unfolded—the bankruptcy of Lehman Brothers.

In no other U.S. financial crisis did two successive administrations of opposing parties work together so harmoniously, aiming toward the same goal with similar means.

The story of that neglect bears repeating. Larry Summers told me that when he was still in the private sector, in March 2008, he informed Paulson that Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs) that bought and sold the bulk of home mortgages—were bankrupt. Paulson did not appear to concede the point, but according to Adam Tooze’s magisterial history Crashed: How a Decade of Financial Crises Changed the World (2019), Paulson was concerned about a “mass sell-off of dollar-denominated assets by China’s reserve managers.” At more than $4 trillion, GSE securities circulating around the world exceeded the amount of United States treasuries in the hands of private investors. As one commentator wrote, the GSEs were “too Chinese to fail.”

Paulson therefore consulted with Barney Frank, the Democratic congressman chairing the House Financial Services Committee. They agreed to pass the Housing and Economic Recovery Act, enacted in July. This law authorized the Treasury to take over the GSEs, guarantee their debt, and thereby dedicate unlimited federal money to assure that any creditor of the GSEs (such as China) would be paid 100 percent on their money due.

But that same March the Wall Street investment bank Bear Stearns failed. The Treasury and Fed collaborated in providing $30 billion of public money to persuade JPMorgan Chase to buy Bear, assume its obligations, and thus quell panic. From that date all three editors knew that another important financial firm outside the insurance regime maintained by the FDIC would fail. It was almost certainly going to be Lehman.

In the summer Paulson alerted Frank to the near certain calamity of the coming crash of a major firm. The solution for the impending bankruptcy of Fannie and Freddie was legislation giving Paulson the ability to seize the firms and backstop their obligations with government guarantees. However, Paulson wanted different authority for any and all Wall Street firms that could suffer uncontrolled runs. Although none of the editors disclose what Paulson told Frank specifically, we know from Paulson’s proposal to Congress after the Lehman bankruptcy what he presumably wanted in the summer.

Obama failed to create a grand political coalition that would give his party the capability to address massive problems requiring collective action.

Paulson’s preferred plan was to have the Treasury buy the “troubled assets” of the big Wall Street banks—those loans made that were not likely to be paid given the economic downturn and the securities that were likely to be worth much less than the banks had paid for them. (This is why his plan was called the Troubled Assets Relief Plan or TARP.) Frank told him that if he wanted new legal authority he would have to explain why. Paulson states that he refused on the grounds that making the “compelling case” about the risk would “have precipitated exactly what we wanted to avoid.” In other words, if he said that Lehman or a similar firm was about to go bankrupt, the run could start immediately. Paulson would be blamed. Alternatively, if he waited for the inevitable event, he could arrive on the scene like a firefighter, demanding the water from Congress to put out the conflagration. (The water was $700 billion in spending authority.)

What Paulson has not conceded is that his plan could not have survived public scrutiny or passed Congress. With the cover of the smoke from the many specific fires that Lehman caused, Paulson insisted on legislation that bailed out banks, but did not change bank leadership, sanction any firms, oblige any to undertake any public duties, or even limit their bonus payments.

Another contributing factor to Paulson’s decision not to ask for expanded legislative authority in the summer may have been politics. Even President Bush, notably inattentive to the details of the economic situation, would not have wanted to condone such a Cassandra-like warning of impending financial disaster. A Republican Treasury secretary’s public proclamation would have greatly boosted Obama’s chance of winning in November.

In any event, although the Lehman bankruptcy was not unexpected, Paulson had not prepared in advance any of the many stopgaps his able colleagues describe in this manual. Instead, he focused on begging Obama and the Democratic congressional leadership to pass the bad bill he hurriedly sketched out. However, the Republicans could not deliver the support of many of their House members, and Paulson’s proposal failed. The Democrats cobbled together a modestly improved version, and with a few more Republican votes it passed in early October, only three weeks after the Lehman bankruptcy. Then Paulson was persuaded to buy stock in banks, a maneuver that he dreaded. That proved vital to quelling the panic.

Meanwhile, the first responders could not stop the crisis from metastasizing to many other organs of the financial industry: money market funds, the insurance industry, the automobile financing, the housing market, and so on. Despite the lack of preparation, in one market after another the skilled administrators of the editors quickly figured out what to do and acted with dispatch. The chapters of this book document their decisions with admirable candor.

The editors might have reached a different conclusion if they had tried to account for the tsunami of firing and foreclosure that swept the country in the wake of the banking industry’s foolishness.

The contributors to this book repeatedly communicate their sense that their success was in doubt. Yet both before and after the Lehman bankruptcy, the managers of the U.S. government’s moneymaking machinery commanded unstoppable financial force. Ultimately, the Fed extended more than $3 trillion of nearly free money to many dozens of firms worldwide. Never in doubt either was whether Wall Street eventually could be restored to primacy in the U.S. economy. Very much up for grabs, however, were two outcomes: who would suffer, and who would be enriched. As a result of the editors’ decisions, the middle class came to bear the brunt of the economic and social suffering, leaving stockholding elites better off. The editors do not discuss whether they foresaw these outcomes.

Tragically, the banks did not do the job the editors wanted done. They failed to allocate capital in the volume needed to drive speedy, substantial, and sustained economic growth: in the decade following the crisis, private savings greatly exceeded private investment by somewhere between $5 and $7 trillion. That investment, had it occurred, could have provided affordable clean power to every consumer and business, rebuilt transportation infrastructure everywhere, and financed low-cost higher education for all students. The war the editors were supposed to win was the struggle to get private money to deliver public goods. The other great disappointment was that China took the lead as the driver of global investment, displacing the United States from the position it had occupied since World War II.

All the Obama advisers and congressional decision makers acknowledged that the government needed to spend hundreds of billions of dollars to get people hired, and the spending needed to start quickly. The form and amount of the stimulus were agreed by the Obama team in Chicago on December 16, 2008, and presented to Congress soon thereafter. It was enacted into law on February 17, 2009. But the stimulus was on the order of $800 billion, less than half the size that was needed. As a result, unemployment rose above 10 percent and was not much lower at the time of the November 2010 Congressional election. That contributed mightily to the Republican seizure of the House.

Jason Furman states the administration’s oft-repeated excuse: “The fiscal response suffered significant shortcomings, largely the result of the political difficulty of persuading Congress to sufficiently stimulate the economy in early 2009.” But this explanation is not persuasive. We know the House would have voted for a bigger package, and the Obama team got almost exactly what it decided to ask for in Chicago on December 16, 2008.

The stimulus decision in size and shape violated the First, Second and Third Lessons, while paying respect to the fundamentally backward Fourth Lesson. The authors did not correctly anticipate the true depth of the recession; they did not apply overwhelming fiscal force to stop the downturn and start the recovery; they did not explain openly what was really going on; and they didn’t have a moral stance that could be explained to the country.

It is the failures of neoliberal planning that Paulson, Geithner, and Bernanke—forgoing as they do any serious reflection on the right aims of government—still have not reckoned with.

On January 10, 2009, incoming Obama administration economists published a prediction that the desired stimulus would keep unemployment from going much above 9 percent and would get it down to around 7 percent by the time of the midterm election. At the same time, they, Paul Krugman, and other savvy students of the situation knew from recently published hiring and firing numbers that unemployment was going to be much higher, and that, as a result, the stimulus was unlikely to produce that predicted outcome. The incoming administration decided to ignore the signals and stick with its plan, knowing it was too small. They thought it was more important to get the package authorized quickly than to have it be big enough.

Time proved this to be wrong. It would have been better to have sought funding for infrastructure projects even if they were not, in the jargon of the time, “shovel-ready.” The incoming Administration should have increased welfare payments of diverse kinds, offered the Republicans the egregious tax cuts that had to be proffered in December 2010 anyhow, and committed the government to loaning into public-private projects. In total the direct and indirect spending should have been about $700 billion a year for each of the years 2009, 2010, and 2011. The Obama decision makers, including Geithner, did not want to take these steps. They incorrectly feared that the size of the government deficit would kick off inflation, which would be good for homeowners but bad for banks. The new Treasury secretary expressed concern that a larger stimulus could hurt his bid to get Congress to allocate more investment in banks, an inconceivable project that he wanted on the table until the markets deemed banks sufficiently recapitalized.

The editors might have reached a very different conclusion if they had not looked at their result as qualified success but instead tried to account for the tsunami of firing and foreclosure that swept the country in the wake of the banking industry’s foolishness, the failure of real estate prices to recover over a decade, and the extreme underinvestment by the financial sector that followed the crisis. From that perspective, the problem to be explained is not how a second Great Depression was averted, but why the government failed to use its full authority to get the real economy—not just the financial sector—on a solid path of high growth. Presumably the three editors thought that after being put back in working order, Wall Street would once again tick to the designs of neoliberal clockwork—allocating capital efficiently, creating jobs, and improving wages. Yet that is exactly what did not happen.

The government officials for whom this manual was written should think differently about the goals of policy—and about the means to achieve them.

It is these failures of neoliberal planning that the editors—forgoing as they do any serious reflection on the right aims of government—still have not reckoned with. They must have thought restoration of Wall Street was their principal goal, not because they cared only about their business acquaintances but rather because they saw efficient financing as the means to avoid a deeper economic downturn. In the years since the crisis was quelled, however, private finance alone has not addressed the major problems in the economy or society. Nor has it produced the widespread improvement in the standard of living that citizens expect.

In the next crisis, those who occupy the positions held by the editors and their colleagues will be hard-pressed to work harder, be more ingenious, or more altruistic than they were. But the government officials for whom this manual was written should think differently about the goals of policy, and more broadly about the means to achieve them. The decisions taken now more than a decade ago have greatly undermined people’s trust in government, and if the next crisis does not produce a better outcome, the republic itself is at risk.