If Memory Swerves: The 1 Percent Laughs Last, as Wall Street Wins Again
Five years after wrecking our economy, the big banks are back. Here's why we need real government regulations
September 15 marked five years since the beginning of the economic slump that defines the world we live in. Disaster was in the air already by that day in 2008: real-estate values had been falling for some time, Bear Stearns and several big commercial banks had failed, and the government had taken over the mortgage insurers Fannie Mae and Freddie Mac the previous week. But that Monday morning in September was when the larger economy went over a cliff — after Lehman Brothers, the nation’s fourth largest investment bank, finally succumbed to the effects of the noxious securities on which it had gorged itself for years.
Later that day, in a climate of almost complete panic, Merrill Lynch — the nation’s third-largest investment bank, which had fed at the same trough — managed to find shelter in the arms of Bank of America. By the next day, the Federal Reserve and the Treasury Department announced that they were saving AIG, the mammoth insurance company that had transformed itself into a stealth hedge fund. As for actual hedge funds, more than 700 of them collapsed in the subsequent four months. And Goldman Sachs and Morgan Stanley, the last two investment-banking leviathans, desperately registered themselves as “bank holding companies” and threw themselves upon the mercy of the all-forgiving Fed.
It was the unavoidable explosion after decades of deregulation and willful blindness. A kind of waste product had been deliberately moved through the bowels of a hundred shady mortgage outfits. It was then gilded by delusional ratings agencies and sold to the world by the most respected names in finance. Bribery and deceit and crazy incentives had been the laxatives that pushed this product down the pipe; money and bonhomie and reassuring economic theory had been the sedatives that put the regulators to sleep.
The industry would supervise itself, we were told — and we believed it. Instead our economic order turned out to be wobbly, even rotten. The great banks looked insolvent. The great capitalists looked like criminals.
Then came a second outrage to rival the first. Treasury Secretary Hank Paulson, who had been effectively promoted to king by a frantic George W. Bush, demanded and received $700 billion from Congress to resuscitate the banks run by his former colleagues on Wall Street. There was a class of businesses, we learned, that could not be allowed to fail, no matter what kinds of suicide missions they undertook; and there was a class of people who could not be held responsible for their deeds, no matter how they beggared the world or deceived their marks. That this class’s chosen public persona was one of churlish, sniggering contempt for the non-crooks who were now required to rescue them only compounded the shock.
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For the people who were left to cry over cratered investments and pay for the bailouts and endure the downturn, the 2008 collapse may well be the central economic episode of their lives. The consequences for them were sharp and immediate. The Dow Jones Industrial Average began its toboggan ride to 6,550, while gold bounded up toward $1,900 an ounce. Unemployment eventually idled around 10 percent of the working population. Barack Obama became president, Glenn Beck became the media figure of the moment, and the spicy culture-war morsels on which we had chewed for 30 years suddenly seemed bland and tasteless. Meanwhile, the collapse reverberated around the world. The British, the Germans, the Italians and everyone else, it now seemed, had been snacking on American-made toxins.
The events of those days haunt us still. I mean this not only in the sense that unemployment is still high and that Greece is still in ruins, but that a fresh scandal seems to surface every week or so. A few months ago, the website of the Irish Independent posted recordings of telephone calls made by Anglo Irish Bank executives in September 2008. That’s when Anglo Irish, which had spent the preceding decade investing in real estate — if “invest” is the word for the kind of insane bets the bank made — crashed in spectacular fashion and approached the Irish government for a bailout.
In the recordings, two executives note that the bank tricked the government by saying it required only €7 billion to regain solvency. Once that was gone, the executives speculated, the government would be forced to shoulder the entire burden of Anglo Irish’s worthless loans. Which is precisely what happened, to the tune of some €30 billion, an amount roughly equivalent to 18 percent of Ireland’s GDP. In this way, the bank’s private folly was transformed into what one Irish journalist later called a “public noose . . . that has all but choked the life out of this country.”
And how did the solemn Anglo Irish execs speak of their nation-strangling enterprise on that awful day five years ago? It should surprise nobody that they laughed like hyenas. Or that one of them told the other that he pulled the €7 billion figure “out of my arse.” Or that this same proctological prestidigitator reasoned that if the government “saw the enormity of it up front, they might decide they have a choice.”
In the United States, we have had time to reflect, and have come up with a slightly different interpretation of the 2008 disaster: It was government’s fault from start to finish. Oh, without a doubt. The financial industry, as New York City mayor Michael Bloomberg assured us a few years ago, might be fun to blame, but it was essentially an innocent bystander. Government’s role in ruining the nation was, as the mayor declared, “plain and simple.”
Plain and simple it is, for people who choose to understand deeply disturbing reality as a form of moral caricature. For them the catastrophe is a tidy lesson about what happens when government’s best intentions go awry — in this case, its supposed desire to put poor people into houses they couldn’t afford and didn’t in the least deserve.
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A few weeks ago, I was reminded of how utterly unremarkable this fictional version of 2008 has become. During an NPR segment about interest rates on college loans, the microphone went to a blogger named Keli Goff, who opined that tuition increases were attributable to the availability of federal loans. Big-government policies were screwing things up, she announced, “just like we saw in the housing market. The government should not be in the student-loan business.” This meddling approach was “distorting the market,” Goff continued. The other commentator, a former speechwriter for George H. W. Bush, did not disagree.
It’s easy enough to understand how an opinion like this has become so widespread. Despite all the investigations and hearings and indignant newspaper stories and editorials that have appeared since Sept. 15, 2008, Wall Street still has a vast corps of dedicated and well-compensated defenders. Government has very few.
Its most prominent advocate, President Obama, has always been ambivalent about this part of his job. The one occasion on which he took a forthright stand for the usefulness of government — his famous “You didn’t build that” speech in 2012 — was followed by an immediate retreat under fire. And while Obama won the White House in large part thanks to the events of September 2008, he has said relatively little about who caused the crash itself. It is true that he often speaks of the financial industry’s “reckless” doings during the Bush years. But the idea that society must set rules for the conduct of private business is not a case he is eager to make. His appointees, as well as top Democrats in Congress, have likewise taken pains to mute their denunciations, out of fear of stifling the recovery, or losing out on plutocrat campaign contributions, or both.
Democratic bosses have also steered clear of the kind of populist effort that would have made household phrases out of “one shitty deal” and “IBG YBG” — and inevitably led to prosecutions. Those bankers were campaign donors, after all. And look, Democrats won the election in 2008, and passed their feeble regulatory bill in 2010, and returned Obama to the Oval Office just last year. What’s the problem?
The problem is that we had to blame somebody, and so our fury after September 2008 naturally gravitated back to the familiar pattern of government-hating. To be sure, Americans were already cynical about Washington by the time Lehman Brothers failed. But the “X-Files”–style cynicism of the Nineties — and even the “Rambo”–style cynicism of the Eighties — look like the happy dreams of youth after the terrible knowledge of 2008. I’m talking about the lesson of the bailouts, which was impossible to dodge: that government was essentially the servant and protector of crooks.
Ignoring public cynicism is the easy way forward. You don’t have to vilify or punish anyone, you don’t have to investigate or explain anything. But ignoring it will have terrible consequences, and not just because the Democrats have traditionally been the party of government and will suffer all the more if our epidemic federalphobia is not addressed. The bigger problem is this: The economy has to have rules, and government is how we make those rules. If vigilant financial regulation is missing or suppressed or underfunded, disasters like the crash of 2008 are unavoidable.
But a society that believes good government to be an impossibility is unlikely to do what is necessary to keep industry honest. Instead, its regulators will come to see the regulated, rather than the public, as their main clients. They will imagine that industry can police itself. They will party with their private-sector pals and spin happily through the revolving door. And the rest of us will resign ourselves to scandal after scandal, as a new generation of looters rises up to claim positions at the trough when the old looters retire. Indeed — to repurpose an immortal statement by a certain Bush Administration economist — given what we now think we know about the system, it would be irrational for them not to loot.
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One of the very few healthy effects of September 2008 was that it momentarily disrupted Washington’s consensus of permissible opinion. For years, correctness in the capital had been determined by how deftly a given idea could triangulate between the two parties. The more closely it approached the dead center of the political spectrum, the righter it was. Financial deregulation, as an agreed-upon tenet of both parties, was holy writ, something questioned only by cranks. The social beneficence of Wall Street was equally self-evident.
And then suddenly this modern-day scholasticism, so sensitive to the city’s subtle shades of orthodoxy, seemed as futile as phrenology. The Washington world was shaken to its very foundations as the events of September 2008 momentarily revealed that its pet ideas about Wall Street were nothing but an illusion projected by people whose main object was to stuff their pockets. Could it be that the cranks had been right all along, with their apocalyptic moaning about predatory lending and the repeal of Glass–Steagall?
Not to worry, reader. The walls soon stopped shaking, the planets snapped back into their ageless orbits, and the birds resumed their songs. During the Great Depression, the structure of society and the economy were permanently changed — but this time around, life for the well-situated quickly recovered its delights. Today, the banks are bigger than before, given the wave of emergency mergers and buyouts that followed the crisis. The march of inequality slowed briefly during the disaster, but has since continued its robust progress toward the social arrangements we remember so fondly from the days of the McKinley Administration. As the historian Robert McElvaine recently pointed out to me, a talented hedge-fund manager contrived to make $2 billion in 2012. If you do the math, figuring that he worked eight-hour days and took two weeks of vacation, you will discover that this fine fellow earned more than $1 million an hour.
Yes, the center holds — per the title of Jonathan Alter’s new book about the Obama Administration and the election of 2012. And what a triumph that is. The center came close to ruining us with decades of blind economic consensus, but now it has won an election, and in Washington that is all that matters.
There is one way, however, in which the changes brought about by 2008 have been permanent — one way in which the center will probably never hold again. We are a society that watched as those who obeyed the rules got played by Wall Street and Washington. And it has not only hardened us, made us more blasé about corruption; it has corrupted us. We beheld our powerlessness at the hands of the mighty, and we decided that the thing to do was to make Wall Street even stronger. We accepted our powerlessness and then magnified it. Today we all know that another bubble will soon inflate and burst, but we have chosen to live with that — five years from the last, five years to the next! Just grab your cash and hang on.
An edited version of this essay originally appeared in Harper’s magazine.
© 2013 Thomas Frank