Former head of FDIC
Once the system was stabilized in early 2009, we had an opportunity to restructure and break up Citigroup in particular, but we didn’t do that. I think that was a missed opportunity. We just reinforced too-big-to-fail with all these bailouts, let’s face it. Other than Lehman Brothers, nobody took their medicine. Restructuring Citigroup would have sent a powerful signal that the government had the gumption and courage to stand up to these very large institutions, and to impose losses on bond holders.
I think we’ve improved the system on the margin. There are higher capital requirements, there’s better bank liquidity, less reliance on short-term financing, less reliance on debt among the regulated banks. Those are all positive things. But the financial system we have is still basically the financial system we had in 2008, with more capital and less reliance on short-term funding, so whether it’s enough? I hope it is.
I wish we had more Republicans who would stand up to these cronies who want the government bailouts. I think a lot of people still want that on Wall Street — it’s secretly what they want. They think it’s the government’s obligation to keep them afloat. I’m a capitalist, and I’d rather have the state own them than have that system.
It’s very frustrating. It’s just stupid economics. Set the morality aside; it’s just dumb economics to have a system like this where you’re propping up inefficient, bloated institutions. So there are good economic reasons to not have the system we had in 2008, and whether we’ve gotten rid of it or not I don’t know. I think we won’t know until a big bank gets in trouble again. Then we’ll see what happens. I don’t even want to think about what the political fallout would be.
The first and most obvious fallout is that in the ’90s and the ’80s — when pensions were being switched over to 401(k)s — there was a strong sense that the stock market really was this kind of profound divination and assurance of all well-being. You’ve got a whole generation of people, my generation and even a little bit older, whose entire futures are caught up in — if they’re lucky, by the way — 401(k)s and the state of the stock market. It really knocked the wind out of the fundamental belief that the market would take care of things.
A couple weeks ago, a friend on Facebook who’s in advertising — and who’s not a political person at all — posted something: Hey, guys, what are we all thinking about retirement? And it was just shocking, the unanimity among everybody, that retirement was not something that would ever happen. And these are people who are upper-middle class, professional managerial class, and not thinking of working forever because work is fun.
The triumph of the neoliberal consensus, post-1989, was to naturalize the economy. Here are these laws that are fairly apolitical, untouchable, the equivalent of the laws of nature. What the financial crisis, and then the response to the financial crisis, did was to denaturalize that again. So suddenly the economy looks political. The combination of the stimulus package and Obamacare threw open all over again the possibility of government intervention in the economy in a way that had seemed very much closed off, permanently, for a generation. But while [the stimulus package and other measures] restored some kind of basic semblance of health in the economy, all of the fundamentals about wages in particular remained pretty much the same. Our economic situation as a lived experience has not changed and is as fundamentally precarious as it was before. And that’s a very explosive situation.
You know, Tocqueville has this very famous argument in his book on the French Revolution, where he says it’s not steady immiseration that creates the conditions for revolution. It’s actually situations that are kind of getting better but not getting better fast enough. That’s when people start looking at more radical alternatives.
I was in a panel around 2005 when an economist from Freddie Mac said that they do stress tests and they’re safe. I was raising the possibility that home prices might fall. He said, “We have taken simulations that go as far as a 13 percent drop in home prices, and we can survive that.” I’m paraphrasing him.
So then I said, “Well, what if it falls more than 13 percent?” And he said, “They’ve never fallen more than that, not since the Great Depression.” And so I said, “Well, what about that? It happened in the Great Depression.” He sort of made me look like a fool for saying that could happen. So these things become so remote that they become storybook-land, and then we set ourselves up for another one.
People learn things — sort of — and then years go by, and there are new success stories that people hear about and they want to be part of it. And then people who warn them about getting overexposed, as more years go by, start to look like losers.
One thing that has brought back some of the old feeling is the fact that we’ve set new records for home prices in nominal terms and the stock market, so it provides some sense of vindication for those feelings of ten years ago. We’ve had three big peaks. One was in the year 2000 in the stock market, and then in 2007 in the stock market and the housing market. And then now again, both the stock market and the housing market are at record highs. So the sense of humiliation is fading, and the sense that the 2000s, before 2007, was a mistake is fading.
I don’t think that we can protect people from human nature. We have a stock market, which is on its own. Way back in the 1930s, they put on margin requirements to prevent you from borrowing too much to buy stock, but that didn’t stop us. And so you plug holes, and then it’s like the Dutch boy and the dike. Another one springs because there’s a basic human drive, a speculative drive. So to some extent we have to let people make their own mistakes. Along the way a lot of great things happen.
The main legacy of the Great Recession is going to be accelerating the concentration of wealth. I have a figure that’s going to come out in our next report that says between 2007 and 2016, the average wealth of the top one percent increased by $4.9 million at the same time as the wealth of the median family declined by $42,000. The wealth is being sucked out of the middle and pushed to the top. That’s what you would expect from the type of bailout that they did. They let homeowners drown and they bailed out financial institutions whose shareholders are mostly very affluent families.
Young people who came into working age, they face permanent repercussions because they can’t get jobs, or if they can get jobs, the jobs are not paying that well. And of course a lot of them are putting on more and more debt if they’re getting a college education.
And so you kind of get a lost generation of sorts. A mild lost generation. You know, like they weren’t killed in a war. And one of the ways that you see this effect is a drop in fertility. There was a very marked decline after the recession. And that’s mostly young adults who obviously are making an economic decision that they can’t afford children. And you don’t recover from that.
And obviously there’s a racial component too that I feel has been very overlooked. I don’t think people realize just how bad the Great Recession was for black and Latino families. The level of wealth decline in those groups … You could write a whole reparations article just off what happened in the past eight years. Like, you don’t even need to go back to the GI Bill. You could just say, “Look at what happened where clearly racially predatory bankers load black families up with these subprime mortgages and just extract wealth out of them.” That’s the story that’s not been fully discussed, for one reason or another.
Founder, naked capitalism
Trump is crowing about this 4.1 percent GDP growth, right? Yet if you look at the statistics, real worker wages have continued to be flat for this period. The crisis itself was the greatest looting of the public purse in history. The crisis itself was a huge wealth transfer. The Obama administration should have forced a lot more recognition of the losses. These losses were real. They should have forced more loan write-downs. And recognition of the loss to the financial system. And they should have had a huge stimulus to offset the downdraft of recognizing those losses. And in fact the Japanese, early in their crisis, they said the biggest mistake we made was not writing down the bad loans in the banking system. Don’t repeat our mistake.
And we did this in a more indirect manner by having the Fed engineer these super-low interest rates that were a transfer from savers to the financial system. Economist Ed Kane said that basically savers lost $300 billion in income a year. So that reduction of income right there, you see today. There’s a Wall Street Journal story about how pension funds are in crisis. There’s not a single mention of the fact that the zero-interest-rate policies are the reason why the pensions are in distress. All retirees and long-term savers, life insurance, they’re all in the same boat. It used to be that if you were a saver or an asset holder, you could get a decent positive return doing something not crazy. And the Fed took that away. The big reason the pensions are in crisis is because the way we dealt with the crisis.
We have this fallacy that normal people should be able to save for retirement. If public pension funds, which can invest at the very lowest possible fees, can’t make this work, how is Joe Mom-and-Pop America gonna be able to do this? Again, it’s back to the stagnant worker wages. So, great, we’re not paying people enough, housing prices are very inflated. We’ve got this horrible medical system that costs way too much, and how are people supposed to put any money aside when their real estate and their rents and their health costs are going up?
Why do you think we have Trump? I mean, even though he did a big bait-and-switch, as we all know, there were a lot of people that lost their homes, their community wasn’t what it used to be, particularly if they lived in the Rust Belt. And then you have these people on the coast saying, “Oh, they should go get training. It’s disgusting.” I mean, let them eat cake is let them get training. What you hear from these coastal elites: People over 40, even over 35, are basically non-hirable. Are you gonna train them? They’re gonna waste their time thinking they can get a new job? I mean, that’s just lunacy.
I think the Republicans, because they’re sort of loud and proud, that’s the way they behave, it’s easier to point fingers at them. And in some sense they are more vocal proponents of bad ideology, but there’s this great tendency in politics and in business to present whatever was done as being terrific and successful when it wasn’t. This is one of my criticisms of the Obama administration, but now appears to be true of the Democratic Party generally, that they think the solution for every problem is better PR.
Musician and filmmaker
The quote-unquote real-estate boom was all bullshit. One of the things that’s in the movie — there’s that billboard saying, “Be a responsible baby daddy, join Worry Free.” Well, the way that the idea of buying a house was being sold, specifically to black people, was that you are being irresponsible with your money if you’re not listening to the experts, and this is why black people are in poverty — they don’t spend their money right. You should be buying a house. And that any other view was an irresponsible view! Because you’re not listening to the experts — by the way, the experts are real-estate salespeople. To bring it up as this being a contradiction was to be thought of as some sort of conspiracy theorist. We haven’t learned certain lessons. Some of us have — but the way we talk, the media thinks about things, we haven’t learned certain lessons.
I think the job that was done by both the Bush administration and the Obama administration was really remarkable in retrospect. They were operating in real time, with banks literally close to failure over a weekend, banks having to be merged over a weekend to be saved. It’s amazing to me in retrospect how many correct decisions both administrations made. I’m sure if they look back they would think of some things they might do differently. I suspect that if I looked at the auto thing, I might think of some things we should have done differently, but not many. So I think we should all be pretty grateful.
The key decision in the case of both the banking crisis and the auto crisis was the decision that government needed to step in. Remember, there were people who argued that the market should work and capitalism should be allowed to function and government had no business investing in banks or saving banks or saving auto companies. The pressure to not intervene was particularly acute during the Bush administration.
There’s all this discussion about what happened, what went wrong, what led to 2016, and I’m always struck by the fact that the economic crisis is frequently left out of the narrative. Right? This right-wing resurgence we’re seeing now also has its roots in the financial crisis. Because it’s still running off this tea-party energy. I think 2008 is too often left out precisely because it does pose a tremendous challenge to the Democratic Establishment. Because then you have to look at the legacy of Bill Clinton and you have to examine Obama’s handling of the bailout and the way he treated mortgage holders and the fact that there was not even a symbolic punishment of the people who had committed the crimes that left people absolutely devastated.
Did you get a chance to look at this looting paper? This is a couple of crises ago. In effect, what [economist George Akerlof and I] showed is that seemingly small weaknesses in your regulatory system can open up enormous risks, and enormous opportunities for private profit. So what it tells you is that under-regulating or mis-regulating is much more dangerous than people generally accept. So I think most economists think of this as kind of, “We’re on the top of a smooth hill. Even if you’ve got it kind of, sort of, right in terms of regulation, you’re fine. A little deviation one side or the other, it won’t really matter.” We were trying to say, “No. It’s like a cliff. You go a little bit over the cliff, in terms of what you allow with your regulatory system, you’re gonna get really terrible outcomes.”
Everybody disliked that paper. After the financial crisis, some people, including Larry Summers, told me they now saw that the looting story captured the reality in a way that they hadn’t recognized before. This is what worries me, people are kind of heading back to the pre-crisis worldview. Regulation is never perfect. You can always kind of complain about imperfections. But I think the kind of weakening, at the behest of the industry, that we’re going through right now should be generating a lot more academic concern than it is generating at the moment. There’s a complacency that’s setting back in. There’s a tolerance now for, oh, maybe let’s err a little bit on the side of under-regulating. You know, how much harm could it cause?
The knock-on effects that arose as a consequence of failing to keep people in their homes impact everything from academic performance of the kids who were in those families to the health of the parents, the balance sheets, the credit scores. When you lose your home and you lose your job, the aftereffects that stay with you make it difficult for tens of millions of Americans to even take advantage of the policies that were designed to bring about a recovery. Low interest rates, for example. Well, low interest rates don’t help the unemployed person whose credit has been destroyed take advantage of cheaper borrowing, refinance a home when you’ve lost your home. The people who were unfortunate enough to have entered college around the time we were building up to the Great Recession, the early 2000s, 2004, 2005, you’ve likely taken out student loans to help cover the cost of college. Now you graduate and you enter into the labor market at the worst possible time in 35 years or whatever since the recession of the early 1980s. The prospects for finding employment at all are extremely grim, and then the jobs that you thought you would be competing for with advanced degrees and so forth aren’t there. You’re taking jobs that pay perhaps half of what you anticipated making. You can’t pay off the student-loan debt and move out and start your life, so you stay home with your parents.
For that unfortunate cohort, there is a period of their lives, maybe it’s ten years, where depressed earnings, a lack of ability to enter the job market, and so forth, it has lasting effects. That time period, that snapshot in time, that decade or so where they’re going to suffer potentially a lifetime of damage as a consequence.
Interviews by Noah Kulwin, Nick Tabor, and Molly Fischer