In late 2008, President George W. Bush, Secretary of the Treasury Hank Paulson, and Federal Reserve Chairman Ben Bernanke, met with the CEOs of the nation’s largest banks. Bush stated that the nation was looking down into a Financial Abyss. At that meeting, he announced that he had instructed Treasury to immediately transfer tens of billions of dollars to each of those banks and, later, the Fed Chairman suggested that there was plenty of more money where that came from.
Over the next six months, the stock market continued to plunge, and unemployment continued to climb, after Lehman Brothers fell into bankruptcy. As cash liquidity and available credit vanished, businesses closed, and the housing market hit rock bottom as foreclosures surged. Unemployed workers just could not stay current on their mortgage payments, and they reduced their consumer spending, as well.
As a financial advisor during that time, I can attest to the fear and anxiety that many consumers, not just homeowners, felt during the so-called “Great Depression.” The teamwork and creative hard work that the Fed and Treasury put in, during both the Bush and Obama Administrations, is still not adequately appreciated. The common question was, and still is: Why Wall Street and not Main Street?
There are several parts to the answer: the Fed and Treasury already had, at least, some of the necessary tools on hand to bail-out the banking system; while new programs to aid consumers, especially homeowners, and expand the social safety net, would need the approval of a dysfunctional Congress. As such, the quickest response was a matter of financial logistics. Main Street–think the Economy–absolutely needs a functioning Banking System. Many financial analysts, at the time, referred to the economy as the “patient”, and they figuratively followed it’s virtual progress: into ER: through Triage: OR: Post-Op: and beyond.
In that context, consider liquid money and the availability of credit as being vital to the proper functioning of the economy, similar to the flow of blood and oxygen within a human’s overall system. And the credibility—both the capability and the willingness—of the government to build a firewall around the banking system, represents the hope for the patient’s survival. That’s why the government threw lots and lots of money at the banks, beginning in October of 2008.
The Treasury and Fed did try to devise new programs to assist consumers directly: extending unemployment compensation; food stamps; short-term loans; mortgage assistance; but, over time, they realized that they were merely using tools with low probability of short-term success. Enhancing the liquidity within the banking system; however, and forcing banks to make credit available, had a much better chance of expanding the job market, and thereby resuscitating the economy.
Bailing-out GM and Chrysler, which are not even banks, demonstrated a great opportunity to jump-start the economy, on a top-down, rather than individual, basis. By keeping those two corporate giants solvent, the government not only kept auto workers in the labor force; but, also those of: the parts suppliers; steel companies; auto dealerships; auto insurers and finance companies, and a multitude of other American workers. People who are employed pay taxes, buy homes and cars; patronize the retail stores, etc. And consumer spending, in turn, just creates even more jobs, and so on!
Following the Stock Market Crash of ’29, and the subsequent Great Depression, new legislation was enacted, creating the FDIC deposit insurance and other financial safeguards. At the beginning of his Administration, President Barack Obama initiated the drafting of new legislation—updated for today’s much more complex financial marketplace—to reduce the potential for other dire economic melt-downs in the future. Unfortunately, the Dodd-Frank legislation has been watered-down by the Republicans in Congress, and after six years, they still want to repeal it. When will they ever learn?
NOTE: For anyone who has an interest in learning more about The Great Recession, I very strongly recommend “Stress Test”, a book by Timothy Geithner. Mr. Geithner was intimately involved, both as Secretary of the Treasury and President of the New York Fed, throughout the Financial Crisis, as well as the various currency crises in Mexico and Asia, in the 1990s. That and other books relevant to that time are on the “Recommended Books” on this blog.