Ben Bernanke

David Warsh: In the Panic of 2008, Bush did the right things

Headquarters of doomed Lehman Brothers.

Headquarters of doomed Lehman Brothers.


At a time when the antipathy between Republicans and Democrats is at a fever pitch, it is worth recalling the desperate events 10 years ago when America’s center held together very well after the collapse of Lehman Brothers precipitated a financial panic, the first in many decades, that seemed to come out of nowhere to threaten a depression even worse than that of the 1930s. The White House put its full support behind the Federal Reserve Board’s role as lender of last resort. Congressional leadership of both parties reluctantly backed the president.

Two attempts were required to persuade the House to authorize the Treasury Department’s $700 billion supplement to the Fed’s own funds. The second succeeded, the measure passed, and U.S. leadership galvanized the central banks of the United Kingdom, the European Union, Canada, Sweden, Switzerland and Japan in a coordinated monetary easing.

In late September, 2008, 12 of the 13 most important U.S. financial firms had been at the brink of failure, Federal Reserve Chairman Ben Bernanke later told the Financial Crisis Inquiry Commission. By mid-October the unbridled fear had given way to full-alert wariness. Much of the credit for stemming the panic belongs to George W. Bush, who put the full force of his presidency behind the effort, before stepping out of the way of the presidential-election campaigns. (His wise choices weren’t obvious at the time.)

Instead of horrific gridlock, the U.S. economy sank into a deep recession.

A persistent itch remains to blame the crisis on the Bush administration, at least in some quarters. After all, Bernanke, Treasury Secretary Henry Paulson and New York Federal Reserve Bank President Timothy Geithner were hired during his watch, Geithner (by the New York Fed) in 2003, Paulson and Bernanke in 2006. Two books arguing against the heroic interpretation of their performance of the roles have appeared recently.

The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster (Cambridge), by Laurence Ball, of Johns Hopkins University, argues that Bernanke and Geithner had the authority to save the troubled investment bank whose failure initiated the panic and that the central bankers were bullied by Paulson out of doing so. A Crisis of Beliefs: Investor Psychology and Financial Fragility (Princeton), by Nicola Gennaioli, of Bocconi University, and Andrei Shleifer, of Harvard University, claims that the Lehman failure should have been no surprise, that policy beforehand should have been more aggressive, and that the systemic run on the banking system was unpredictable was mostly a myth. (Shleifer, unfortunately, didn’t predict it.)

Neither interpretation is likely to stand up to professional scrutiny. The first-person accounts of the policy-makers – Bernanke (The Courage to Act), Paulson (On the Brink) and Geithner (Stress Test) – and the wealth of supporting material that has grown up around them are likely to remain the primary narrative of the crisis.

Today another crisis of great magnitude threatens, this one involving the U.S. Supreme Court. Once again former President Bush is involved, this time as a key supporter – as of last Thursday – of nominee Appeals Court Judge Brett Kavanaugh

It was Bush who hired Kavanaugh into the White House as an assistant counsel in 2001, who promoted him to staff secretary in 2003. (Those who followed the tribulations of Rob Porter, former staff secretary to President Trump, will know something of the close bond that develops between a president and the supervisor of his decision-making queue.) Bush presided over the marriage of his long-time personal secretary Ashley Estes to Kavanaugh in 2004, then two years later nominated his fellow Yale alum to the federal appellate court bench.

Bush last week reiterated his support of Kavanaugh after the testimony of Christine Blasey Ford, having earlier told Politico, “Laura and I have known and respected Brett Kavanaugh for decades, and we stand by our comments the night Judge Kavanaugh was nominated.” On that occasion he had said, “He is a fine husband, father, and friend – and a man of the highest integrity. He will make a superb justice of the Supreme Court of the United States.”

Then came the dramatic news that the Federal Bureau of Investigation would spend an additional week digging deeper into the nominee’s past. Meanwhile, the significance of Judge Kavanaugh’s partisan and untrustworthy testimony last week will continue to sink in. It won’t get any easier for the former president to maintain his support.

Probably no opinions outside the Senate, public or private, matter more to the fate of his nomination than those of George and Laura Bush.  The Republican Party is in disarray. If it still has a leader, it is Bush.

David Warsh is a Somerville-based columnist and economic historian, as well as proprietor of, where this column first appeared.



David Warsh: The high-speed bailout of 2009


I spent some hours last week browsing the newly released transcripts of Federal Open Market Committee meetings in 2009.  Mostly I relied on the extraordinary “live tour” and subsequent coverage by The Wall Street Journal team.

I was struck by how greatly the action had shifted to the incoming administration of President Barack Obama.   The acute-panic phase of the crisis was past, and relatively little of the drama of that troubled year is captured in the talk of monetary policy.

On Jan. 15, President George W. Bush asked Congress to authorize the incoming Obama administration to spend $350 billion in Troubled Asset Relief Program funds.  Obama was inaugurated Jan. 20.

Treasury Secretary Timothy Geithner on Feb. 10 announced a financial stabilization plan consisting mainly of stress tests for the nineteen largest bank holding companies.

In a conference call, Fed Chairman Ben Bernanke explained to the Federal Open Market Committee that the details were hazy. “It’s like selling a car: Only when the customer is sold on the leather seats do you actually reveal the price.”

On Feb. 17 Obama signed the American Recovery and Reinvestment Act of 2009, a stimulus package of around $800 billion in spending measures and tax cuts designed to promote economic recovery.

In March the Fed announced it planned to purchase $1.25 trillion of mortgage-backed securities in 2009, expanding the “quantitative easing” program it had begun the previous November.   Also the administration’s bailout of the auto industry was completed.

In May, Geithner reported that nine banks were judged sufficiently well capitalized to have passed the stress tests. Ten others would be required to raise additional capital by November.  Gradually the stabilization was recognized to have been a success.

And in August, Obama nominated Bernanke to a second term as Fed chairman. Senior White House adviser Lawrence Summers had been unsuccessful in his efforts to replace first Geithner, then Bernanke.  He would try again.

Bernanke’s book-length account of all this is expected in the fall. About the same time, U.S.  Court of Claims Judge Thomas Wheeler likely will have delivered a verdict in a lawsuit against the government alleging that Bernanke acted illegally when the Fed took control of insurance giant American International Group at the height of the crisis.

Meanwhile, Summers has been repositioning himself, perhaps hoping to return to the White House in a Hillary Clinton administration.  In a New York Times piece, ''Establishment Populism Rising,'' Thomas Edsall interviews the Harvard professor for an update on Summers’s thinking.

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I continue to get my news of Russia from even-handed Johnson’s Russia List – five issues last week alone, containing 188 items from the U.S., European and Russian press, most of which, needless to say, I did not read.  Two that I did stood out.

Jack Matlock, ambassador to the disintegrating Soviet Union under George H.W. Bush,  wrote  on his blog that the “knee-jerk” conviction that Vladimir Putin  was directly responsible for the deliberately shocking murder of Russian dissenter Boris Nemtsov overlooks other possibilities. “So far nothing is absolutely clear about this tragedy except that an able politician and fine man was gunned down in cold blood,” he concluded.

Peter Hitchens, in The Spectator, argued that It’s NATO that’s empire-building, not Putin. His principal authority, George Friedman, founder of the high-end publisher Stratfor, dates the current phase of the conflict from Putin’s refusal to go along with US policy in Syria in 2011.

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I was struck that when the Club of Growth asked Wisconsin Gov. Scott Walker about his foreign- policy credentials, he replied that he considered Ronald Reagan’s decision to fire striking federal air-traffic controllers in 1981 “the most important foreign-policy decision of his lifetime.”


{Added by New England Diary overseer: Walker said of the firings; "It sent a message not only across America, it sent a message around the world'' that "we weren't to be messed with.''}

When you’re a kid with a hammer, the whole world looks like a nail.

(Reagan speechwriter and Wall Street Journal columnist Peggy Noonan offered Walker some half-hearted backup and The Washington Post zeroed in on Walker’s  cram course in foreign policy.)

I mention it mainly ir to say that, having spent most of my life covering economic development, one way or another, I’d say that the skein of events more important to U.S. foreign policy than any other were those in which the march in Selma, Ala.,  commemorated this weekend played an important part.

David Warsh is proprietor of and a longtime financial journalist and economic historian.

David Warsh: Deconstructing the Great Panic of 2008



Lost decades, secular stagnation -- gloomy growth prospects are in the news. To understand the outlook, better first be clear about the recent past. The nature of what happened in September five years ago is now widely understood within expert circles. There was a full-fledged systemic banking panic, the first since the bank runs of the early1930s. But this account hasn’t yet gained widespread recognition among the public. There are several reasons.

For one thing, the main event came as a surprise even to those at the Federal Reserve and Treasury Departments who battled to end it. Others required more time to figure out how desperate had been the peril.

For another, the narrative of what had happened in financial markets was eclipsed by the presidential campaign and obscured by the rhetoric that came afterwards.

Finally, the agency that did the most to save the day, the Federal Reserve Board, had no natural constituency to tout its success in saving the day except the press, which was itself pretty severely disrupted at the time.

The standard account of the financial crisis is that subprime lending did it. Originate-to-distribute, shadow banking, the repeal of Glass-Steagall, credit default swaps, Fannie and Freddie, savings glut, lax oversight, greedy bankers, blah blah blah. An enormous amount of premium journalistic shoe leather went into detailing each part of the story. And all of it was pieced together in considerable detail (though with little verve) in the final report of the Financial Crisis Inquiry Commission in 2011.

The 25-page dissent that Republican members Keith Hennessey, Douglas Holtz-Eakin and Bill Thomas appended provided a lucid and terse synopsis of the stages of the crisis that is the best reading in the book.

But even their account omitted the cardinal fact that the Bush administration was still hoping for a soft landing in the summer of 2008. Nearly everyone understood there had been a bubble in house prices, and that subprime lending was a particular problem, but the sum that all subprime mortgages outstanding in 2007 was $1 trillion, less than the market as a whole occasionally lost on a bad day, whereas the evaporation of more than $8 trillion of paper wealth in the dot-com crash a few years earlier was followed by a relatively short and mild recession.

What made September 2008 so shocking was the unanticipated panic that followed the failure of the investment banking firm of Lehman Brothers. Ordinary bank runs – the kind of things you used to see in Frank Capra films such as "American Madness" and “It’s a Wonderful Life”– had been eliminated altogether after 1933 by the creation of federal deposit insurance.

Instead, this was a stampede of money-market wholesalers, with credit intermediaries running on other credit intermediaries in a system that had become so complicated and little understood after 40 years of unbridled growth that a new name had to be coined for its unfamiliar regions: the shadow banking system – an analysis thoroughly laid out by Gary Gorton, of Yale University’s School of Management, in "Slapped by the Invisible Hand'' (Oxford, 2010).

Rather than relying on government deposit insurance, which was designed to protect individual depositors, big institutional depositors had evolved a system employing collateral – the contracts known as sale and repurchase agreements, or repo – to protect the money they had lent to other firms. And it was the run on repo that threatened to melt down the global financial system. Bernanke told the Financial Crisis Inquiry Commission:

As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period… only one… was not of serious risk of failure…. So out of the thirteen, thirteen of the most important financial institutions in the United State, twelve were at risk of failure within a week or two.

Had those firms begun to spiral into bankruptcy, we would have entered a decade substantially worse than the 1930s.

Instead, the emergency was understood immediately and staunched by the Fed in its traditional role of lender of last resort and by the Treasury Department under the authority Congress granted in the form of the Troubled Asset Relief Program (though the latter aid required some confusing sleight- of-hand to be put to work).

By the end of the first full week in by October, when central bankers and finance ministers meeting in Washington issued a communique declaring that no systemically important institution would be allowed to fail, the rescue was more or less complete.

Only in November and December did the best economic departments begin to piece together what had happened.

When Barack Obama was elected, he had every reason to exaggerate the difficulty he faced – beginning with quickly glossing over his predecessor’s success in dealing with the crisis in favor of dwelling on his earlier miscalculations. It’s in the nature of politics, after all, to blame the guy who went before; that’s how you get elected. Political narrative divides the world into convenient four- and eight-year segments and assumes the world begins anew with each.

So when in September Obama hired Lawrence Summers, of Harvard University, to be his principal economic strategist, squeezing out the group that had counselled him during most of the campaign, principally Austan Goolsbee, of the University of Chicago, he implicitly embraced the political narrative and cast aside the economic chronicle. The Clinton administration, in which Summers had served for eight years, eventually as Treasury secretary, thereafter would be cast is the best possible light; the Bush administration in the worst; and key economic events, such as the financial deregulation that accelerated under Clinton, and the effective response to panic that took place under Bush, were subordinated to the crisis at hand, which had to do with restoring confidence.

The deep recession and the weakened banking system that Obama and his team inherited was serious business. At the beginning of 2008, Bush chief economist Edward Lazear had forecast that unemployment wouldn’t rise above 5 percent in a mild recession. It hit 6.6 percent on the eve of the election, its highest level in 14 years. By then panic had all but halted global order-taking for a hair-raising month or two, as industrial companies waited for assurance that the banking system would not collapse.

Thus having spent most of 2008 in a mild recession, shedding around 200,000 jobs a month, the economy started serious hemorrhaging in September, losing 700,000 jobs a month in the fourth quarter of 2008 and the first quarter of 2009. After Obama’s inauguration, attention turned to stimulus and the contentious debate over the American Recovery and Reinvestment Act. Summers’s team proposed an $800 billion stimulus and predicted that it would limit unemployment to 8 percent. Instead, joblessness topped out at 10.1 percent in October 2009. But at least the recovery began in June

What might have been different if Obama had chosen to tell a different story? To simply say what had happened in the months before he took office?

Had the administration settled on a narrative of the panic and its ill effects, and compared it to the panic of 1907, the subsequent story might have been very different. In 1907, a single man, J.P. Morgan, was able to organize his fellow financiers to take a series of steps, including limiting withdrawals, after the panic spread around the country, though not soon enough to avoid turning a mild recession into a major depression that lasted more than a year. The experience led, after five years of study and lobbying, to the creation of the Federal Reserve System.

If Obama had given the Fed credit for its performance in 2008, and stressed the bipartisan leadership that quickly emerged in the emergency, the emphasis on cooperation might have continued. If he had lobbied for “compensatory spending” (the term preferred in Chicago) instead of “stimulus,” the congressional debate might have been less acrimonious. And had he acknowledged the wholly unexpected nature of the threat that had been turn aside, instead of asserting a degree of mastery of the situation that his advisers did not possess, his administration might have gained more patience from the electorate in Ccngressional elections of 2010. Instead, the administration settled on the metaphor of the Great Depression and invited comparisons to the New Deal at every turn – except for one. Unlike Franklin Delano Roosevelt, Obama made no memorable speeches explaining events as he went along.

Not long after he left the White House, Summers explained his thinking in a conversation with Martin Wolf, of the Financial Times, before a meeting of the Institute for New Economic Thinking at Bretton Woods. N.H. He described the economic doctrines he had found useful in seeking to restore broad-based economic growth, in saving the auto companies from bankruptcy and considering the possibility of restructuring the banks (the government owned substantial positions in several of them through TARP when Obama took over). But there was no discussion of the nature of the shock the economy had received the autumn before he took office, and though he mentioned prominently Walter Bagehot, Hyman Minsky and Charles P. Kindleberger, all classic scholars of bank runs, the word panic never came up.

On the other hand, the parallel to the Panic of 1907 surfaced last month in a pointed speech by Bernanke himself to a research conference of the International Monetary Fund. The two crises shared many aspects, Bernanke noted: a weakening economy, an identifiable trigger, recent changes in the banking system that were little-understood and still less well-regulated, sharp declines in interbank lending as a cascade of asset “fire sales” began. And the same tools that the Fed employed to combat the crises in 2008 were those that Morgan had wielded in some degree a hundred years before – generous lending to troubled banks (liquidity provision, in banker-speak), balance-sheet strengthening (TARP-aid), and public disclosure of the condition of financial firms (stress tests). But Bernanke was once again eclipsed by Summers, who on the same program praised the Fed’s depression-prevention but announced that he had become concerned with “secular stagnation.”

The best what-the-profession-thinks post-mortem we have as yet is the result of a day-long conference last summer at the National Bureau of Economic Research. The conference observed the hundredth anniversary of the founding of the Fed. An all-star cast turned out, including former Fed chairman Paul Volcker and Bernanke (though neither historian of the Fed Allan Meltzer, of Carnegie Mellon University, or Fed critic John Taylor, of Stanford University, was invited). Gorton, of Yale, with Andrew Metrick, also of Yale, wrote on the Fed as regulator and lender of last resort. Julio Rotemberg, of Harvard Business School, wrote on the goals of monetary policy. Ricardo Reis, of Columbia University, wrote on central bank independence. It is not clear who made the decision to close the meeting, but the press was excluded from this remarkable event. The papers appear in the current issue of the Journal of Economic Perspectives.

It won’t be easy to tone down the extreme political partisanship of the years between 1992 and 2009 in order to provide a more persuasive narrative of the crisis and its implications for the future – for instance, to get people to understand that George W. Bush was one of the heroes of the crisis. Despite the cavalier behavior of the first six years of his presidency, his last two years in office were pretty good – especially the appointment of Bernanke and Treasury Secretary Henry Paulson. Bush clearly shares credit with Obama for a splendid instance of cooperation in the autumn of 2008. (Bush, Obama and John McCain met in the White House on Sept. 25, at the insistence of Sen. John McCain, in the interval before the House of Representatives relented and agreed to pass the TARP bill. Obama dominated the conversation, Bush was impressed, and, by most accounts, McCain made a fool of himself.)

The fifth anniversary retrospectives that appeared in the press in September were disappointing. Only Bloomberg BusinessWeek made a start, with its documentary “Hank,” referring to Paulson. The better story, however, should be called “Ben.” Perhaps the next station on the way to a better understanding will be the appearance of Timothy Geithner’s book, with Michael Grunwald, of Time magazine, currently scheduled to appear in May. There is a long way to go before this story enters the history books and the economics texts.

David Warsh is proprietor of, economic historian and along-time financial journalist. He was also a long-ago colleague of Robert Whitcomb.