The Committee to Save the Banks (Hank Paulson, Ben Bernanke and Tim Geithner) has had a lasting negative impact on both the global economy and politics.  A decade after the acute phase of the Great Financial Crisis just how negative the impact of their policies has been is just beginning to be realized.

This negative impact is being recognized globally.

In the UK, the Guardian’s Aditya Chakrabortty wrote

Hardly anybody saw it coming: not the financiers, not the economists, and certainly not my friends the inflation-hawks, nor the rest of the political classes. Yet an event so widely unforeseen was almost immediately interpreted in a thousand different ways. …

Regular readers know I was one of the handful of individuals who saw the financial crisis coming.  The crisis started on August 9, 2007 when BNP Paribas said it could not value subprime mortgage-backed securities.  In December 2007, I was featured in a Bloomberg article describing the opacity problem.  I also said restoring transparency was necessary to minimize the impact of the crisis on the real economy and the global financial system.

Of course, restoring transparency would have resulted in banks doing what they are designed to do.  The banks would have had to absorb the losses on the bad debt in the financial system and in doing so protect the real economy from being burdened by these losses.

Of course, doing this would have resulted in several existing banks going out of business.  It would also have resulted in bankers going to jail for fraud.

The Committee to Save the Banks was dead set against either existing banks going out of business or bankers going to jail for fraud.  Fortunately for the Committee, it had plenty of cover for its policies.

Even as companies were folding and millions of families were losing their homes, the crash became an ideological Rorschach test: you saw in it precisely what you wanted to see. And more often than not, what you saw was other people’s flaws…. Unabashed by their wrong-footing, every know-all had an off-the-peg story to tell about what had just happened – and what must be done next.

There was no place where you could find more cover than the Economics profession know-alls who had been wrong-footed.

Despite being asked by the Queen of England why they hadn’t seen the crisis coming, the members of the Economics profession raced forward and offered up to anyone who would listen what must be done next.  The members of the Economics profession were so insistent in offering up their recommendations for what should be done next they drowned out the voices of individuals like myself who saw the crisis coming and explained what the solution was.

Of course, the Economics profession was predictably wrong in their policy recommendations. [Please note I developed the Information Matrix so in the future economists could understand why the global financial system is designed the way it is, where financial crises come from, how to end financial crises and how to prevent financial crises.]

George Packer in the New Yorker confirmed the damage done by the Committee to Save the Banks under the cover of their Economic profession cheerleaders.

American homeowners learned that their most valuable and tangible asset had become tangled up in obscure entities called derivatives, mortgage-backed securities, and collateralized debt obligations—financial instruments that spread around the world and, once gone bad, threatened to kill off whole banks, and to cripple countries. If a defaulted loan on a house in Tampa was used to make bonds owned by investors in Japan, the house infected the global economy.

It wasn’t the obscurity of the financial instruments that was the problem.  These financial instruments were designed to be opaque.  Investors had to trust the story Wall Street told about the value of these securities with no ability to verify if the story was accurate or not.

Of course, it turned out Wall Street lied.

Notice who suffered the consequences of this lying.

When the crash came here, it wiped out nine million jobs, took away nine million homes, erased retirement accounts, and pushed large numbers of Americans out of the middle class….

Not every member of the Economics profession provided cover for the Committee to Save the Banks flawed policies.

Anna Schwartz, who wrote a book on monetary policy with Milton Friedman, was a lone voice saying the Committee’s response to the acute phase of the crisis was wrong.  In a Wall Street Journal interview, she too called for transparency.

However, she was easy to ignore as many Nobel prize winning economists supported the Committee’s policy response. Under the Committee’s leadership,

the Federal Reserve stopped the free fall of the biggest banks; the press uncovered corruption and fraud; and a bipartisan Congress passed legislation to get credit flowing and rescue the financial sector.

It wasn’t lost on voters it was the bankers who committed fraud who were saved.  Naturally, they responded.

Then the electorate turned out the party in power. The financial crisis decided the election of 2008. Americans who might never have imagined themselves choosing a black President voted for Barack Obama because he understood the scope of the disaster and offered hope for a remedy….

What the voters didn’t know is Obama had already decided his Administration would continue with the Committee to Save the Banks’ response to the financial crisis despite any evidence to the contrary.  This wasn’t the hope and change in policies voters expected.

Not only were the voters hopes dashed, but the true extent to which banks and bankers would escape any negative consequences became clear.

But his biggest mistake was to save the bankers along with the banks. After a financial crisis caused in part by fraud, not a single top Wall Street executive was brought to trial. The public wanted to punish the malefactors, but justice was never done.

It cannot be emphasized enough that what made it possible to save the banks and never bring top Wall Street executives to trial was opacity.  Opacity prevented anyone who wasn’t a regulator from seeing just how badly the bankers misbehaved.

In the years after the crash, you could feel the fabric of the country fraying. The Tea Party and Occupy Wall Street rose up as opposite expressions of antiestablishment rage, nourished by the sense that colluding élites in government and business had got away with a crime. The game was rigged—that became the consensus of the alienated. …. Public trust in just about every American institution declined.

The decline in public trust isn’t surprising once you realize the source of both public trust and confidence in the financial markets is transparency.

While everyone instinctively wants to trust what they have been told, it is the ability to verify the story transparency provides that allows trust and confidence to flourish.

By retaining opacity in the global financial system, policymakers have systematically undermined trust in both the financial system and political institutions.

Until transparency is restored, you can expect to see trust further undermined.