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The Economist Agrees that the Bailouts Didn’t Have to Turn Out This Way

The Economist’s print edition gives one of the unlikelier reviews to Neil Barofsky’s Bailout and Sheila Bair’s Bull by the Horns that I’ve seen (I’ve read the former, and am making my way through the latter). In it, they acknowledge that the US bank bailouts were horribly unfair to the individual Americans who ultimately financed them. While this may sound common sensical to many of us, keep in mind that this comes from the Economist, perhaps the avatar of establishment opinion on the subject.

Is the government too deferential to the concerns of the big banks and insufficiently attentive to the needs of ordinary people? Yes, according to two new books: “Bailout” by Neil Barofsky and Sheila Bair’s “Bull by the Horns”. Both accounts correct other, more triumphalist histories of the financial crisis, such as David Wessel’s “In Fed We Trust”, which came out in 2009 […]

Both books show that the Obama administration devoted much more energy and attention to helping Wall Street than to stemming the foreclosure crisis, despite having been given TARP money to do so. Ms Bair recounts how the methodology used to calculate the “stress tests” was cleverly altered so that Citi would keep its tax breaks. This resourcefulness was not applied to help keep people in their homes, however. Whereas incompetence was common—the rules determining which mortgages would be modified were changed nine times in the first year alone—a bigger problem was that these schemes were not designed with ordinary people in mind. When asked how the government’s efforts were supposed to help homeowners, Timothy Geithner, the treasury secretary, responded by explaining that they would aid the banks by slowing down the pace of foreclosures.

This is a critical concept for establishment media to understand. Homeowners or other individuals not working on Wall Street were completely incidental to the plans of the bailout architects. They committed to saving banks, and undertaking the policies necessary to reach that goal. The collateral damage wasn’t quantified or brought into the decision-making process. As the Economist’s Free Exchange blog points out, Wall Street compensation remains near a record high even while overall jobs get cut. This means that we’ve found the wage growth in the economy – it’s on Wall Street, and nowhere else. This is particularly perverse outcome of the financial crisis. And this anecdote from the Bair book is representative of the mindset of these folks:

In October, 2007, Ms Bair gave a presentation to a group that had been involved in bundling together subprime loans into toxic securities. She asked them why they were refusing to do something (loan modifications) that was fundamentally in their interests. Subprime borrowers were deadbeats, they said. Give them a gift like this and they’ll blow it on a new flat-screen television. In that case, Ms Bair wanted to know, why had these Armani-clad dealmakers lent out the money in the first place? “Bad regulation,” she was told.

They were just forced to make bad loans, in other words, which is a complete inversion of reality. And as Bair and Barofsky illustrate, we could have taken another path that would actually have been beneficial to everyone involved. The idea that the only alternative to hands-off bailouts is financial Armageddon is deliberately limiting and serves Wall Street interests.

To take just one small example, when on the relatively impotent policy board known as the Congressional Oversight Panel, Elizabeth Warren saved taxpayers $1 billion by putting out reports that led to modifications in the TARP program. Just the work of people in minor positions in the government, or even major positions who were outvoted like Bair, had a significant benefit to the taxpayer. Just imagine if that kind of philosophy and mindset were applied at the very top.

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David Dayen

David Dayen