The Political Theater of Economics
Few words have become dirtier faster than "bailout." Republicans hurl it against anyone who voted to save the economy from ruin back in the waning days of the Bush administration. The subsequent bailouts of Detroit were one of the tipping points that led to the formation of the Tea Party movement. And, Democrats, always less effective than Republicans at finding the pithy phrase that tells their side of the story (think "Death Tax"), have tried to simply avoid talking about the bailouts and cross their fingers that the economy turns around by November.
So, it was refreshing to hear Secretary of the Treasury Timothy Geithner explain to members of Congress last week that not only have we recovered most of the money expended by the Troubled Asset Relief Program (TARP) and the Detroit bailouts, but that the taxpayers stand to profit handsomely from their investments. This got lost in the news because Geithner’s answers to questions about China’s re-evaluation of its currency dominated the press coverage.
To be clear, the most important reason for the tsunami of government spending at the end of the Bush administration and the beginning of Obama’s term was to stop the free-falling economy. How quickly forget, amidst the ennui of the anemic recovery in which we find ourselves, that less than two years ago, we were gazing into the economic abyss. We have forgotten that on September 17 and 18, 2008, the yields on short-term Treasury bills dropped below zero and that overnight there were withdrawals from money market funds of over $400 billion (a normal day would see $5 billion in withdrawals). On Sept. 19, Jacques De Larosiere of the IMF warned of a "systematic meltdown." By the time Obama was sworn into office, the economy was losing 700,000 jobs per month.
We are not in that bad place today and while economic growth remains sluggish, sluggish growth is better than precipitous decline any day. And, much of the government spending to save the system is coming back into the U.S. Treasury. You see, when there is a credit crunch, only people with cash can invest. Those with cash, almost by definition, are somewhat conservative or are running for the Senate in Florida. (Investor Jeff Greene called the downturn and made a bundle when the economy collapsed. He is now running for Senate.) But, the government can create money and if it does so wisely, it can help the economy along. So, while the principal reason to buy up troubled assets and prop up the financial sector generally was to stop the collapse, it turns out that in such a scenario, whatever investments the government makes are being made when the prices are very low. Buy low, sell high has long been the recipe for investment success and it turns out that Bush Treasury Secretary Hank Paulson and Geithner made investments that were good as well as necessary.
A bit of history is always a necessary tonic for political excesses. The historian Kevin Phillips writes: "Indeed, the quarter century before 2005 could be described as a triumph of financial-sector protection over marketplace comeuppance." In 1984, yes, during President Reagan’s tenure, the Fed and the Treasury worked together to bailout the Continental Illinois Bank. In that same period, the Fed and Treasury built a series of relief packages to help the struggling economies of Mexico, Argentina and Brazil meet their debt obligations and, in 1994, the U.S. government rescued the Mexican peso, another investment that returned a handsome profit to the U.S,. taxpayer. Under President George H.W. Bush, in addition to the bailout of the Savings and Loan industry, there was as well a government bailout of Bank of New England. The differences of scale are obvious, but then again the threat to the economy was greater in 2008-2009 too.
You can, with a straight face, make the argument that all government bailouts are bad ideas and that the government should not accrue debt to keep financial firms from paying the piper for their bad investments. After all, that is how capitalism works, right, with rewards and punishments? But, when the punishment for risky behavior threatens to bring the whole economy down with it, government cannot sit idly by, whether it is Barack Obama or George H.W. Bush or even Ronald Reagan sitting in the Oval Office. The offense, if an offense it be, is bipartisan. Remember that as the campaign ramps up this autumn.