Henry Paulson

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 economicprincipals.com, where this column first appeared.



David Warsh; McCain and looking for the road back to 'regular order'


I wasn’t surprised in the least when Sen. John McCain (R-Ariz.) flew back to Washington last week to put a stake through the heart of the Republican Party’s effort to kill  the Affordable Care Act. That’s because I remember the last time that McCain interrupted himself to fly back to town.

He was running for president then, against Illinois Sen. Barack Obama, in 2008. The financial crisis had come to a head after a year of growing apprehension. Lehman Brothers had failed on Monday, Sept. 15.  Panic was taking hold in global credit markets for the first time since 1933.

Acute problems had spread beyond the banks.  By Tuesday, Sept. 16, 2008, insurance giant American International Group was on the verge of failure, thanks to the effect of plummeting share prices on its derivative and stock-lending businesses. Treasury Secretary Henry Paulson Jr., had begun calling both candidates daily to brief them, hoping to keep them from saying something that might upset the markets.

On the stump Sept. 16, McCain said, “We cannot have the taxpayers bail out AIG or anybody else.”  Paulson phoned immediately to talk him back from that position. The next day McCain reversed himself, foreshadowing the days ahead.

Two days later, Paulson and Federal Reserve Chairman Ben Bernanke persuaded President George W. Bush and leaders of both parties, meeting in the office of Speaker of the House Nancy Pelosi, to accept the hastily drafted Troubled Assets Relief Program  (TSRP) bill.  And on Friday, Sept.  19, Friday, Bush stood in the White House Rose Garden, along with Bernanke, Paulson and SEC chairman Christopher Cox, to ask Congress to approve a hazy $700 billion bailout plan.  By the following Tuesday, it was clear that the measure lacked the necessary Republican votes to pass in the House.

With the first presidential debate scheduled for the following Friday, McCain announced  that he was suspending his campaign in order to fly back to Washington.  He asked for a meeting with President Bush and Obama. Paulson later wrote that he was “dumbfounded” that the president had agreed to such a conclave. (I am relying here on Paulson’s memoir, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.) Bush explained that he felt he had little choice.

The meeting was held; Obama and his chief economic adviser Lawrence Summers danced rings around the Republicans:  McCain spoke only when called upon at the end, and the meeting dissolved in chaos at its end. In their televised debate that Friday, Obama and McCain condemned Wall Street, but neither mentioned the bailout. Mostly they argued about Afghanistan and Iraq.  Obama decisively won the debate.

The following Monday the TARP bill was defeated in the House.  When it finally passed three days later, as the banking system continued to threaten to collapse, McCain got little credit for his dramatic gesture. Paulson wrote:

"His return to Washington was impulsive and risky, and I don’t think he had a plan in mind. If anything, his gambit only came back to hurt him, as he was pilloried in the press afterward, and in the end I don’t believe his maneuver significantly influenced the TARP legislative process.

"A number of people I respect on the Hill have a different view. They believe McCain ended up being helpful by focusing public attention on TARP and galvanizing Congress to action. And John did later try to find ways for House Republicans to support legislation.   But Democrats absolutely did not want him to get any credit. They wanted the economic issue as their own.''

Looking back, McCain was a central player in one of the great dramas of the 21st Century. The leaders of both parties in Congress, a reluctant administration, central bankers around the world, and both U.S. presidential candidates in an election year – they all agreed on measures that, after many adjustments behind the scenes, prevented a second Great Depression.

Granted, it had been ugly. Every actor displayed a wart or two. “There was no hiding McCain’s rudderlessness over the [first few] days, as he lurched from blunder to blunder,” was how John Heilemann and Mark Halperin described his introduction to the crisis in Game Change.  Sen. Lindsey Graham (R.-S.C.) repeatedly helped his good friend McCain maintain his bearings.  But strip away all the self-interested accounts of the matter by technocrats, and what’s left is a distinct harbinger of McCain’s dramatic action last week.

In a speech two days before his fateful vote last week, McCain took stock of the battles of the last eight years.

"Our deliberations today are more partisan, more tribal more of the time than any other time I remember…. Both sides have let this happen. Let’s leave the history of who shot first to the historians. I suspect they’ll find we all conspired in our decline – either by deliberate actions or neglect…

"The Obama administration and congressional Democrats shouldn’t have forced through Congress without any opposition support a social and economic change as massive as Obamacare. And we shouldn’t do the same with ours.''

Since I clearly remembered the White House event, in March 2009, with which Obama opened his campaign to reorganize healthcare-insurance markets, I couldn’t resist a taking a little peek back at the history of what happened next. Obama’s proposal’s was patterned on Massachusetts’'s 2006 adoption of “Romney Care,” itself based on a Republican proposal for an individual mandate advanced ten years before, in opposition to Hillary Clinton’s more ambitious plans. Obama invited 150 participants to a conference, drawn from all corners of the debate, including Congressional Republican leaders.

 In “The Party of No,” a chapter in The New New Deal:The Hidden Story of Change in the Obama Era, author Michael Grunwald describes the evolution of the Republican leadership’s thinking the wake of Democratic victories – not just the White House, but control of both houses of Congress. Eric Cantor (R.-Va.) was the minority whip then, transparently coveting minority leader John Boehner’s job.  Cantor’s deputy, Kevin McCarthy (R.-Calif.), and Paul Ryan (R.-Wis.) were said to be the GOP’s “young guns.” Rep. Mike Pence (R.-Ind. chaired an initial conference of the party’s leadership in Annapolis. Grunwald wrote:

"The new leaders who gathered in Annapolis had a new mantra.  Our mistake was abandoning our principles, not following our principles. They saw John McCain as a typical Republican In Name Only (RINO) who had sought electoral salvation in ideological equivocation – and look what happened to him.  They even revised their opinions of George W. Bush, who in retrospect seemed less a conservative hero, more a big-spending apostate.''

“Most important, Republicans need to stick together as a team,” exhorted Senate Minority Leader Mitch McConnell.  And so they did.  The Tea Party election came next, in 2010. Republicans took back the House.  Obama was re-elected in 2012. In 2014, Republicans took back the Senate. And by 2016, the strategy of full-throated opposition seemed to have worked. Republicans won the White House.

At least in the matter of healthcare legislation, the Republicans clearly fired the first shot, opposing a program of their own invention just because the opposition party had embraced it.  Let McCain’s exaggeration on this count pass. In the offer of olive branches, no more than in lapidary inscriptions, is a man upon his oath. The path back to the state of mind Senate rules describe as “normal order” is much as McCain described it:

Incremental progress, compromises that each side criticize but also accept, just plain muddling through to chip away at problems and keep our enemies from doing their worst isn’t glamorous or exciting. It doesn’t feel like a political triumph. But it’s usually the most we can expect from our system of government, operating in a country as diverse and quarrelsome and free as ours.

In “The Sanctimony and Sin of G.O.P, ‘Moderates',''  New York Times columnist Paul Krugman, writing last week before McCain’s vote last Thursday against his party,  invited readers “to consider the awfulness of Senator John McCain.” Indeed, Krugman condemned all politicians “who pretend to be open-minded, decry partisanship, tut-tut about incivility and act as enablers for the extremists again and again.” Krugman wrote:

"I started with McCain because so many journalists still fall for his pose as an independent-minded maverick, ignoring the reality that he’s a reliable yes-man whenever it matters.''

Krugman has got it exactly backwards.  On the two occasions of the last 10 years when it has mattered most, McCain stood in the center, with the majority consensus, against his party’s leaders (and, often enough, in matters of lesser issues as well, especially immigration and campaign finance). Krugman, himself an unbridled partisan, should stop insisting that there are no Republican moderates.  The road back to “regular order” begins with giving credit where credit is due.

David Warsh, a longtime business and political columnist and an economic historian, is proprietor of economicprincipals.com.


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 www.economicprincipals.com, economic historian and along-time financial journalist. He was also a long-ago colleague of Robert Whitcomb.