Turns Out Surrendering to Wall Street in 2008 Was a Bad Idea
It has taken a decade, but the Committee to Save the Banks’ decision to surrender to Wall Street is finally being seen by the mainstream media as the truly awful idea and totally unnecessary action it was.
As I wrote in the preface to Transparency Games:
There are events, such as the Space Shuttle Challenger exploding or terrorists flying jets into the World Trade Center, where you remember exactly what you were doing and where you were. For me, one of those events occurred on September 23, 2008, when the United States, the world’s only superpower, surrendered to Wall Street without a single shot being fired.
Shortly thereafter, England and the European Union also surrendered.
Why did governments around the world surrender to Wall Street and England’s version, The City of London? How could governments around the world allow the bankers to continue rigging the global financial markets and looting Main Street without any resistance?
What happened on September 23, 2008?
On that day, U.S. Treasury Secretary Hank Paulson, accompanied by then Chairman of the Federal Reserve Ben Bernanke, requested from the U.S. Congress an initial payment to Wall Street of $700 billion dollars to buy toxic assets from the largest commercial and investment banks.
In making this request, Secretary Paulson demonstrated the salesmanship and political shrewdness that saw him reach the top of one of the largest investment banks, Goldman Sachs, before becoming Treasury Secretary.
He laid out the case that the U.S. economy and particularly Main Street was facing serious problems if the banks weren’t bailed out….
Congress did not immediately give Mr. Paulson what he wanted. Instead, they waited for over a week before surrendering.
While watching Secretary Paulson’s virtuoso performance, a single thought kept recurring to me: What am I missing? Why was the need to surrender to Wall Street for fear of a second Great Depression not credible?
It wasn’t credible because in redesigning and rebuilding the financial and banking systems during the Great Depression, the FDR Administration and Congress, seeing the damage caused by an opacity driven financial crisis, took steps to insure the banking system could survive another opacity driven crisis without being explicitly bailed out.
The FDR Administration and Congress actually went further than just redesigning and rebuilding the financial and banking systems. They demonstrated how to use the new financial and banking systems to end an opacity driven crisis and restrain Wall Street.
Echoing my words, Philip Stevens in an op-ed in the Financial Times observed:
Historians will look back on the crisis of 2008 as the moment the world’s most powerful nations surrendered international leadership, and globalisation went into reverse….what really will puzzle the historians is why the ancien regime was so lazily complacent — complicit, rather — in its own demise.
It was complicit in its own demise because elected officials chose to let the former head of Goldman Sachs drive the choice of policy response to the acute phase of the Great Financial Crisis.
Is anyone surprised that rather than use the financial system as it is designed to protect Main Street the former head of Goldman Sachs decided to save Wall Street instead?
Mr. Stevens described the result of this choice:
After a decade of stagnant incomes and fiscal austerity, no one can be surprised that those most hurt by the crash’s economic consequences are supporting populist uprisings against elites.
Of course, the rise of populism might have been avoided if elected officials had followed up on their lofty rhetoric of reforming Wall Street. But they didn’t. As Mr. Stevens observed:
life on Wall Street and in the City of London has gone on much as before. Bankers are paid the earth for socially useless activities, taxpayers fund large state subsidies in the shape of too-big-to-fail guarantees, and clever young mathematicians create new, dangerously obscure instruments to keep trading rooms busy. Now, as then, profit is privatised and risk nationalised. Missing is the competition that keeps capitalism honest.
Regular readers know what is missing is transparency. The FDR Administration chose it as the foundation on which to rebuild the global financial system.
Transparency keeps capitalism honest. Transparency ends Too Big to Fail and Too Big to Jail. Transparency ends the primacy of finance and makes banks and markets the servants of rather than the masters of Main Street.
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