In preparation for the recent midterm elections, many news publications polled their readers for opinions on various current social and economic issues. One of the most interesting statistics that came to light this month was published by the Washington Post-ABC News poll. When asked to describe the state of the nation’s economy, over 70 percent of people replied that it was either “Poor” or “Not so good.” Even more intriguing, less than 30 percent think it is going to get better anytime soon.
What makes this skew in perception particularly concerning is that the economy, by all quantifiable gauges, is in a boom time that easily rivals that of the Roaring ’20s and has already outperformed some of the best known bull markets in American history. The public perception, however, is obviously not unjustified. The damage caused by the Great Recession has left deep scars in the American psychology and, more to the point, has bred a deep mistrust between Wall Street and Main Street
But while it is easy to see why there is so much resentment toward the Wall Street executives who walked away with millions during the height of the crisis, it is more difficult to understand the distaste the public continues to have for the economic policies the government adopted during that time.
Henry Paulson, the acting Secretary of the Treasury for the majority of the recession, took the brunt of the people’s criticism. According to public perception, Paulson’s tenure consisted of three primary failures: his reaction to the crisis was negligently delayed, his decision to allow Investment Banking giant Lehman Brothers to fail worsened the market situation enormously and the bailout bill he forced through Congress in 2008 ended up being an extremely wasteful use of the government’s capital.
However, before passing such harsh judgment on a man who near single-handedly steered the country through the second-worst financial calamity in American history, I think we must analyze the reasons for his decisions more closely by looking at his so-called shortcomings individually.
In 2006, before any of the major downturns in the market, Secretary Paulson was due to make a presentation on entitlement reform. However, seeing the large excesses that had been building up in the American economy for decades, Paulson requested for permission to speak on his concerns over some of the fundamental issues he saw in the markets and, in fact, did state that he thought there could be a financial crisis at some point during President Bush’s tenure. Though he didn’t address the specific issues in the housing market, Paulson was indeed prepared and well aware that a major crisis was an immediate possibility.
The delay in action when the crisis reared its head in August 2007 was a problem due to the extreme indecision displayed by the members of Congress. If anything, Paulson was only at fault for not being able convince Congress of the severity of the crisis at hand and the fact that truly unprecedented action needed to be taken to have any meaningful impact.
The next criticism, concerning the failure of Lehman Brothers, is simply not one that makes logical sense to direct at the government. The Fed had no authority to guarantee debt or to put in the United States’ capital to rescue Lehman Brothers. Essentially, a loan in the midst of a run from the investment bank would have no chance for success and would have been an entirely wasteful use of taxpayers’ money; the problem needed a solution from the private sector. The fact that Barclays’ U.K. regulator prevented the company from buying Lehman Brothers hours before the deal was set to close was unfortunate, but clearly not an indiscretion on anyone’s part. At that point, there was simply nothing that could be done to save Lehman.
Finally, despite the negative public perception on the bailout bills, they were by far some of the most empirically successful government programs in history. The actions that Paulson and his team were able to convince Congress to undertake were nothing short of extraordinary. It would simply be impossible to argue that the bailout of Fannie Mae and Freddie Mac and the relief that the Troubled Asset Relief Program provided weren’t critically instrumental to averting a catastrophic collapse of both the American and international economies.
Though the majority of these programs had the most direct consequence to Wall Street giants, their true goal was to provide relief to a struggling Main Street. Preventing the collapse of these financial giants was absolutely essential to keep millions of Americans in their homes. Perhaps Paulson identifies his own greatest failure best: “When I’m looking back at criticisms and some of the things I could have done better, the first one I come to is that I was never able to convince the American people that what we did with TARP was not for these banks; it was for them. It was to save Main Street. It was to save our economy from having a catastrophe.”