Reading Dan Gross’s new book, Better, Stronger, Faster, was a strange experience for me. Gross’s account of America’s recovery from the worst financial crisis 80 years is relentlessly upbeat (not to mention terrifically engaging—the guy’s prose really moves). Having written my own, decidedly less sanguine, book, I was curious to see the evidence Gross used to justify his optimism. But it turns out his data points mostly overlap with mine: We have similar takes on the effectiveness of the government’s response to the crisis and the recession that followed. We just grade this response on vastly different curves. Gross deems it an overwhelming success, all things considered. I call it a C+ performance.
How did we end up drawing such different conclusions? One explanation is our respective views on what economic policy can achieve. For Gross, the government is well-suited to rescuing an economy in freefall. It is less well-suited to reviving growth once the crisis has passed, a task he would delegate to the private sector. (Indeed, most of his book is about the ways American businesses have quietly paved the way for the next boom.) According to this view, the government had basically one job beginning in 2008: preventing the economy from collapsing. Once it achieved this—through a combination of spending, tax cuts, rock-bottom interest rates, and lavish bank bailouts—there was little else to do.
My view, by contrast, is that the government is capable of both stabilizing the trauma victim and nursing him back to health. Depending on how you translate that metaphor into macroeconomic data, it’s not clear we’ve been fully nursed even four years after the fact. So while I agree with Gross that the government successfully navigated, say, the six months between September 2008 and March 2009, he basically stops keeping score at that point, whereas I hold the government responsible for our performance ever since.
And that points to a second, more complicated reason for our disagreement: When sizing up the government’s handling of the crisis, Gross dwells on the benefits while mostly ignoring the costs, some of which only became apparent later on. Companies like AIG and Citigroup get bailed out one after the other in Gross’s account, and he barely acknowledges any downside. The most he musters is a mournful shrug.
On one level that’s understandable. After all, it’s hard to imagine a policy whose costs wouldn’t be worth paying if it prevented an economic depression. And yet the costs of those policies were quite large in the end, and their consequences were long-lasting. In fact, one major reason the economy is still underperforming is the fallout from the policies Gross celebrates.
A few examples will illustrate what I’m talking about. Beginning in late 2008, the government started guaranteeing trillions of dollars that banks and other financial firms owed their investors and customers. The guarantees helped banks issue hundreds of billions of dollars of short-term debt at exceptionally low interest rates, and securitize tens of billions of dollars in auto and credit card loans. The government even backstopped the entire $3.4 trillion money-market mutual fund industry.
The guarantees worked, in a manner of speaking. “It’s little known or reported, but virtually all the blanket guarantees offered by the Fed, the Treasury Department, and the FDIC were lifted without being used,” Gross writes, by which he means the government hardly paid out a dime to the companies whose liabilities it had insured. Better yet, he says, the government actually made money on the transactions: It pocketed $10.36 billion in fees for guaranteeing the banks’ short-term debt, $1.2 billion for backstopping the money market industry, and so on.
But this is a pretty narrow parsing of the term “used.” The guarantees were in fact used extravagantly. The panic subsided once everyone understood that the price of any bank bonds they owned wasn’t going to collapse because the government was backing them, and so they stopped unloading them. They understood that the savings they’d parked in money market funds weren’t going to disappear overnight, and so they stopped withdrawing them. Everyone abruptly calmed down once they knew the government was insuring all their assets.
Which is to say, just because the government didn’t pay out any cash claims doesn’t mean it didn’t transfer hundreds of billions of dollars in benefits to Wall Street. It did, in the same way that an insurance policy is still valuable even if you never file a claim. Suppose, for example, that an insurer offered to buy your house for the full price you paid any time you wanted to sell it. This would guarantee that you never lost money—a huge benefit even if you subsequently sold the house for a profit. Now, what are the chances an insurer would give you this benefit for free, or would charge you one two-thousandth of the amount it was insuring (the fee the money-market funds paid for their insurance)? Not great, I’d say. And yet that’s what happened with the guarantees the government gave Wall Street.
Gross makes this sort of oversight a handful of times. He explains that the Capital Purchase Program, the focal point of Treasury’s bank bailout, required banks to pay a five percent annual interest rate and hand over “warrants” entitling Treasury to buy shares in them at a discount. This led to billions in profits for the government from certain banks—about $7 billion from Citigroup alone—and helped the program stay in the black overall. But, again, this overlooks how cushy a deal the banks actually got. Recall that Goldman Sachs paid Warren Buffett a 10 percent interest rate for a similar arrangement (on a much smaller chunk of capital), and you begin to understand the amount of money the government left on the table.
The point isn’t that the banks shouldn’t have gotten these subsidies—many were so weak they couldn’t afford to pay full freight. The point is that the existence of these freebies created a massive political problem—people understood the banks were getting a deal that wasn’t available to them even if they didn’t quite understand the terms—and the administration never defused it. (For that matter, many in the administration never even acknowledged it. When David Axelrod and Robert Gibbs moaned about the beating Barack Obama was taking for giving the banks hundreds of billions of dollars, Treasury Secretary Tim Geithner responded, “We didn’t give the banks any money.”) And this political problem was just as real a cost of the bailouts as the financial one—only much, much larger.
By 2010, after all, the average American had come to understand three things about the recovery: That no expense had been spared in reviving the banks; that this had worked fabulously well, since the biggest banks were rolling in profits; and that his own financial situation had barely improved since the dark days of the crisis.
Had the administration been better attuned to this combustible mix, it might have exacted more pain from the banks (say, an excess profits tax that took back tens of billions in subsidized earnings) and done more to boost the real economy (Gross and I agree that it needed more stimulus). Unfortunately, these circumstances went largely unmitigated, which had the perverse effect of punishing Democrats (who on balance had been tougher on Wall Street and more committed to economic relief for the masses). The party lost control of the House and, with it, most of its ability to strengthen the recovery. Instead of spending 2011 figuring out how to boost the economy, which nearly slipped back into recession, the White House spent the year shadow-boxing with John Boehner over how to slash the federal budget.
So, yes, the administration deserves credit for steering us clear of a horrific economic fate. Anyone who denies this is simply arguing in bad faith. But when it comes to the bank bailouts, Gross’s premise—that the administration hasn’t gotten enough credit—strikes me as a somewhat off. The administration has gotten all the credit it deserved and then some. That’s really the whole problem.
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