I recently read a fascinating Washington Post article about the TARP bailouts and how taxpayers will not be on the hook for as much as we originally feared. The good news is that the government, which initially allotted $700 billion dollars for the rescue effort, will (astoundingly!) recoup all but $19 billion of that money.
Of course, the bad news is that regulatory laxity led to the meltdown in the first place. People will never recoup the money that they lost in ravaged retirement accounts and diminished home equity, not to mention lost houses, lost jobs, and other personal tragedies. As author of the article Jared Bernstein puts it,
Government regulation of financial markets failed miserably, but government actions helped put out the fire, albeit after badly burning the economy. It’s hard to applaud the fire department when it abetted the arsonists.
Bernstein’s observation brings to mind a powerful passage from Victor Hugo’s novel Ninety-Three, which I read decades ago in a Carleton College French class. I’ll set the scene and then you can decide how well it applies.
Hugo’s novel, his last, is about the 1793 French civil war between supporters of the French Revolution and supporters of the aristocratic counterrevolution. (The revolutionaries won and the terror was the result.) The scene I’m thinking of involves a ship’s cannon that has gotten loose. Hugo tells us that there is nothing worse on board a ship than a loose cannon (thus the expression). As you read his description, imagine that something comparable was occurring in 2008 in the world’s financial sector. Think of the cannon as a financial derivative:
A gun that breaks its moorings becomes suddenly some indescribable supernatural beast. It is a machine which transforms itself into a monster. This mass turns upon its wheels, has the rapid movements of a billiard ball; rolls with the rolling, pitches with the pitching; goes, comes, pauses, seems to meditate; resumes its course, rushes along the ship from end to end like an arrow, circles about, springs aside, evades, rears, breaks, kills, exterminates. It is a battering ram which assaults a wall at its own caprice. Moreover, the battering ram is metal, the wall wood. It is the entrance of matter into liberty. One might say that this eternal slave avenges itself. It seems as if the power of evil hidden in what we call inanimate objects finds a vent and bursts suddenly out. It has an air of having lost patience, of seeking some fierce, obscure retribution; nothing more inexorable than this rage of the inanimate.
The mad mass has the bounds of a panther, the weight of the elephant, the agility of the mouse, the obstinacy of the ox, the unexpectedness of the surge, the rapidity of lightning, the deafness of the tomb. It weighs ten thousand pounds, and it rebounds like a child’s ball. Its flight is a wild whirl abruptly cut at right angles.
This loose cannon claims human victims:
At the moment when the lashings gave way the gunners were in the battery, some in groups, others standing alone, occupied with such duties as sailors perform in expectation of the command to clear for action. The carronade, hurled forward by the pitching, dashed into this knot of men, and crushed four at the first blow; then, flung back and shot out anew by the rolling, it cut in two a fifth poor fellow, glanced off to the larboard side, and struck a piece of the battery with such force as to unship it. Then rose the cry of distress which had been heard. The men rushed toward the ladder; the gun-deck emptied in the twinkling of an eye. The enormous cannon was left alone. She was given up to herself. She was her own mistress, and mistress of the vessel. She could do what she willed with both. This whole crew, accustomed to laugh in battle, trembled now. To describe the universal terror would be impossible.
It appears only a matter of time before the cannon destroys the entire ship. And while people weren’t dying in the financial crisis, Secretary of the Treasury Henry Paulson and those who understood the situation must have experienced their own brand of terror as they watched the world’s credit seize up, with no bank willing to loan money to any other bank.
The cannon is saved by an extraordinary act of bravery. The man in charge of the gun, he who failed to secure it properly, darts in and, at the risk of almost certain death, plants a handspike inside the cannon’s wheel, bringing it to a stop:
It was ended. The man had conquered. The ant had subdued the mastodon; the pygmy had taken the thunderbolt prisoner.
What happens then? First, the gunner is presented with the cross of St. Louis for exemplary bravery. All the sailors cheer.
Then, because the accident was his fault, he is shot.
So looking back at those grim days of September 2008, let us applaud Paulson and George Bush and those legislators (some who would go on to suffer electoral defeat for their vote) for having taken the necessary steps. With the world on the brink of a second Great Depression, the secretary and president jawboned bankers, twisted arms in Congress, and saved the country. And while we’re at it, let’s give Bush credit as well for the auto bailout, which he, not Obama, set in motion. If the United States is currently doing better than Europe, it is because of those measures.
And then let’s shoot them for having dismantled the banking regulations in the first place. If they hadn’t loosened the chains holding the cannon, it wouldn’t have done its damage. To be bipartisan about it, I’m also willing to execute Bill Clinton for his role in banking deregulation.
As we look at the way that Congressional Republicans since then have been fighting regulatory reform tooth and nail, let’s remind ourselves of the state of the ship that Barack Obama inherited. I can’t put it better than Victor Hugo:
The man had conquered, but one might say that the cannon had conquered also. Immediate shipwreck had been avoided, but the corvette was by no means saved. The dilapidation of the vessel seemed irremediable. The sides had five breaches, one of which, very large, was in the bow. Out of the thirty carronades, twenty lay useless in their frames. The carronade, which had been captured and rechained, was itself disabled; the screw of the breech-button was forced, and the leveling of the piece impossible in consequence. The battery was reduced to nine pieces. The hold had sprung a leak. It was necessary at once to repair the damages and set the pumps to work.
The gun deck, now that one had time to look about it, offered a terrible spectacle. The interior of a mad elephant’s cage could not have been more completely dismantled.
“Mad elephant” about fits our situation. Almost from the first, all but a handful of Republicans refused to work with the president to fix the ship and prevent future mishaps from occurring. (Keynesians under Bush who argued, with Cheney, that deficits don’t matter, magically transformed into deficit hawks under the Democrats.) If Obama loses the election because the electorate fails to remember what he inherited—if people can’t see anything more than that the ship has failed to reach the cruising speed we would all like to see—then I can’t help but think that an injustice will have been done.
Update – I see that New York Times columnist Paul Krugman has a column this morning on this question of amnesia as he wonders whether the American people and the media will let Mitt Romney get away with claiming that the financial crisis happened on Obama’s watch. (Romney was giving a press conference in front of a factory that had been closed under Bush.) Not that Krugman lets Obama off the hook, noting that even given the political constraints under which he was working he could have done more. But Krugman notes that Romney’s anti-regulatory, safety net slashing, laissez-faire economic proposals would be like a third Bush term.