Janine Jackson interviewed Dean Baker about the 10-year anniversary of the financial crisis for the September 21, 2018, episode of CounterSpin. This is a lightly edited transcript.

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Janine Jackson: When Donald Trump awarded himself top marks for his administration’s disaster response in Puerto Rico, media had little trouble looking askance, contrasting Trump’s assessment with empirical data and presenting him as, at least potentially, an unreliable narrator.

That critical posture is not much in evidence, though, as Ben Bernanke, Timothy Geithner and Henry Paulson offer their assessment of the country’s financial crisis, the ten-year anniversary of which was marked this week. In an op-ed in the New York Times, the trio of economic decision-makers discuss how, though they “did not foresee the crisis,” they “moved aggressively to stop it,” and now we’re enjoying the effects: banks that are “financially stronger” and regulators “more attuned to system-wide risks.”

Dean Baker is a senior economist at the Center for Economic and Policy Research in Washington, DC, and author of a number of books, including Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. He joins us now by phone. Welcome back to CounterSpin, Dean Baker.

Dean Baker: Thanks for having me on, Janine.

JJ: A theme of Paulson and Geithner, Treasury secretaries under George W. Bush and Barack Obama, respectively, and former Federal Reserve chair Ben Bernanke, in their recent outings, is that they took the hard decisions and were misunderstood. On NPR, Paulson said, “We weren’t doing this for Wall Street,” and Bernanke added, “We didn’t make that case.” So this is referring, of course, to the bailout. Before we talk about the details of that, and the effects of it, that it was necessary to avoid 1929 all over again is taken as a given. But should it be?

DB: No, I was in the middle of this at the time, and it was a very frustrating time for me, because here you had people—certainly these three, Bernanke, Paulson and Geithner at the center of it—who had totally missed the boat on everything that was going on in the economy. They missed the housing bubble. It was easy to see. I was writing about this. I was not the only one, but there, unfortunately, were not a lot of us, and it was in the economic data. So it’s not like I had some magic crystal ball. It was very clear in the data. They completely missed it.

It blows up, leads to financial disaster, which was predictable. Housing’s always a heavily leveraged asset. People typically buy homes with 20 percent off and 10 percent down; during the bubble years, they were often borrowing with zero down. So it’s always a heavily leveraged asset, but especially during the bubble years. It was predictable. Everything about this was totally predictable.

And then, suddenly, when it happens, they go, “Oh, guess what, we have to save the banks.”  And they started yelling about, there’s going to be, you know, the economy won’t exist. They were saying stuff like this, these three. Just incredibly irresponsible, outrageous things that had no basis in reality.

And they set this bar that, “If we don’t have a second Great Depression, we’ve succeeded.” And it’s sort of like the Olympic runner going, “Oh, I’m going to have a great mile. I’m going to have a great mile. But the big thing is finishing.” If you’re an Olympic runner, finishing a mile is not an achievement. Avoiding a second Great Depression is not an achievement. It was a total crock, and basically what they were trying to do is save the Wall Street banks.

We had a once-in-a-lifetime opportunity to let the market work its magic. We’re supposed to have conservatives, people who believe in the market and everything. Let the market work its magic, and in one fell swoop, we would have had the most dramatic financial reform you’d have ever seen. We’d have gotten rid of Goldman Sachs, Morgan Stanley, Citigroup. We’d have downsized these institutions, and we’d have a financial system that does what it’s supposed to do: serves the real economy. We’d have gotten rid of massive bloat, these outrageous salaries, people getting tens of millions, sometimes hundreds of millions. That would have been gone in a flash, but they wanted to make sure, Geithner, Bernanke and Paulson wanted to make sure, that didn’t happen.

JJ: And the current talking point, explicitly: “We weren’t doing this for Wall Street,” Paulson says, but people just somehow didn’t understand that.

DB: It might have helped if they didn’t lie all the time.

JJ: Exactly. Exactly.

Well, I certainly remember, also, media at the time about how it might”feel good” to see some folks actually being held accountable, but really, that was just simple-minded vengeance thinking, and, anyway, we’re going to achieve justice, or minimally deterrence, some other way, you know? And the idea was, “Really, it’s too complicated for you to really understand.” But wrongs were committed, were they not? And if that’s that case, what did we see that looked anything like accountability?

DB: You know, the fact that all the same people are still turned to as authorities—certainly these three, but I saw Robert Rubin being prominently cited the other day. Robert Rubin was the person who, in the Clinton administration, was at the center of the movement for deregulation. He was a big proponent of it.

Then in 1998, after arranging to have Glass/Steagall repealed, he went to work for one of the biggest beneficiaries, Citigroup, and was a top executive there, and cleared over $100 million over the next, I guess it would have been, eight years. And, of course, Citigroup is absolutely at the center of the crisis. Might have been a good person to investigate. In fact, the Financial Crisis Inquiry Commission recommended that, but that didn’t happen.

And, in fact, Eric Holder’s kind of an incredible story. Eric Holder, of course, the first attorney general under President Obama, said, “Well, these institutions, it would be dangerous to the stability of the financial system to go after them,” and then he got questioned about that: “What do you mean, you’re not going to prosecute wrongdoing because you think the financial system—?” And he said, “Oh, no no no. I didn’t mean that.”

Mr. Holder’s a very intelligent person. He wouldn’t have said something like that unless he meant it. There was no ambiguity in his statement. It’s not like Trump, when he said, “Oh, not,” you know, about Russian involvement in the election.

There was a decision not to prosecute these people, and let me just be real clear, because there’s been a number of people saying, “Oh well, they were fooled by the bubble, as well.” There was actually a study, I think it was done by the Atlanta Fed, that found that a lot of bank executives were heavily involved in real estate; ipso facto, they couldn’t have possibly been doing anything illegal, because they believed the bubble too.

I believe they believed the bubble, but that’s not the issue. The question was, were they following normal legal practices in issuing mortgages and mortgage-backed securities, and selling those mortgage-backed securities? And I’m prepared to say, I don’t think that’s true.

So the fact that they were also deluded…. The guys doing the fraud at Enron, most of them owned huge amounts of Enron stock. They probably, in some way, believed that Enron, at the end of the day, would be a good company. But that doesn’t excuse fraud, and that’s, in effect, the argument that we’re getting here.

JJ: I think what’s also being skated over in the conversation, it’s as though it’s all on paper, and we can’t forget the real-life devastation that was wrought by the bubble, and by the pushing of these subprime mortgages, in which black and Latino homeowners were disproportionately affected. So when you get to the New York Times op-ed, again, by this triumvirate, and they say, “The desire to maintain living standards no doubt contributed to a surge in household borrowing before the crisis,” it sounds still a little bit like blaming the victims, to some extent.

DB: Well, look, people made bad choices. They weren’t forced to borrow money; they were encouraged to. And, again, it was Geithner’s job, Bernanke’s job, Paulson’s job to prevent that, and again, they’re acting…. Reading that piece, they go, “We didn’t know.” How on Earth did you not know? The Commerce Department puts out data every month on savings, and that was going through the floor.  How could they miss that? Are these guys idiots? I don’t think they are. I’m saying, I’m just pointing out: They didn’t look at what was in front of them.

Or, alternatively, they thought it was just fine. Greenspan actually wrote several pieces with one of the Fed economists, talking about, “Look at this. This is wonderful. People withdrawing equity from their homes. They’re refinancing and withdrawing equity from their homes.”

This was not a surprise. Everyone knew it was going on. They looked at this and said it was fine. So that they would tell us today that, “Oh, you know, people were borrowing more than they could afford to pay back”—that was known at the time, and it was their job to prevent that, and instead they just sat on their hands and said, “This is great.”

JJ: What are some of the impacts of the bailout itself, currently—not the crisis, but the response to it? What are some of the effects, that we’re still seeing, of the choices that were made at that time?

DB: There’s two things. One, we have a massively bloated financial sector. So anyone who cares about inequality, if they really care about inequality, they should really be upset about the bailout, because that was a great opportunity to get rid of a lot of the inequality, because a lot of the very richest people in the country, they’re in finance. And the market was going to do it for us, but they wouldn’t let it. So that’s a really big thing.

As an ongoing matter, that’s a really big drain on the economy. If people at the New York banks are drawing salaries of millions, tens of millions, that’s the same impact on the economy as if the government were paying that out. This is a drain on the economy. These people with resources, they drive up rents, they drive up house prices, because they have a ton of money. So that’s a really big issue.

The other thing that I think is hugely important, and can be often overlooked: That really changed people’s attitudes towards the government. Not that they necessarily were warm and fuzzy towards the government, but everyone saw this. It was a massive thing. That, here it is: These guys got themselves in a pickle. No one forced Citigroup to make bad loans. No one forced Goldman Sachs to hold mortgage-backed securities. They acted in very irresponsible ways. Obviously, it hurt millions, tens of millions, in the process, but it was going to put them out of business, and what happens? Government runs to rescue them. So that creates a huge amount of hostility towards the government, both right and left, but the result was that after, as we went into the recession, it was much harder to get support for stimulus, because people didn’t trust the government.

And I don’t know how many times I heard people confusing the bailout with the stimulus. The stimulus was about creating jobs, getting the economy to grow. People confuse the two. I was once on an NPR show, I think it was Kansas City, but it really doesn’t matter where exactly it was, but the point was it was a fairly large city, and an NPR host totally confused the bailout with the stimulus. And it made it very difficult to get support for policies that would have revitalized the economy.

JJ: Finally, Matt Taibbi in Rolling Stone wrote that, “History is written by the victors, and the banks that blew up the economy are somehow still winning the narrative.” Of course, a lot of that has to do with media coverage and media misunderstanding, as you note, of the crisis and of the response to the crisis. At this point, what can reporters be doing to correct the kind of misrepresentation of this whole set of issues?

DB: It’s a little frustrating. I’d say doing a little homework. I did a paper on the housing bubble and the financial crisis, and I’ve argued strongly that this was about the housing bubble. That’s what gave us the Great Recession; the financial crisis is very much secondary. And I’ve been almost alone on that. I mean, Paul Krugman, obviously a very prominent economist, with a very strong voice in the New York Times, he basically agreed with me 100 percent.

I’m happy to engage in arguments on this. I don’t know anyone who’s got an argument on the other side, because, to my view, the data is just so overwhelmingly on the side that, “Look, it was a housing bubble.”

Just to put it as simply as possible: After the financial crisis had gone away—whatever year you want to pick, 2010, 2011, 2012—the data looked much more like what it was at the trough of the recession in 2009 than it looked in 2007.

In other words, we had the bubble, it burst, and that was a one-time event. The financial crisis was very much secondary in that story. So I would encourage reporters to do a little homework. I’m happy to plug my paper, just because it’s free. They don’t have to pay anything for it. It’s not long. It’s not complicated. You don’t need a PhD in economics. People really should look at that. The financial crisis is very much secondary. The story was a very big bubble that people like Bernanke, Paulson and Geithner completely missed. It burst, and we paid an enormous price for it.

JJ: We’ve been speaking with Dean Baker, co-founder and senior economist at the Center for Economic and Policy Research. Find their work, including Dean’s Beat the Press blog, at CEPR.net. Dean Baker, thank you very much for joining us this week on CounterSpin.

DB: Thanks a lot for having me on.

 

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The tenth anniversary of the collapse of Lehman brought a flood of news stories on the financial crisis. The housing bubble, whose collapse precipitated the crisis, was only mentioned in the background if at all.

In keeping with the general tenor of the commentary, Brookings brought in former Fed chair Ben Bernanke to present a paper saying the story of the Great Recession really was the financial crisis. To my knowledge, they did not have anyone making the case for the bubble.

I won’t go through the whole story here since I just did a paper on the topic. (I’m happy to say Paul Krugman largely agrees with me.) Rather I will say why I think there is such an aversion to acknowledging the importance of the housing bubble to the Great Recession.

The first reason to discount the bubble is that acknowledging its importance in the Great Recession highlights the immense failure of public policy that led to this disaster. The point is that the bubbles, and especially bubbles that drive the economy, are easy to see.

After largely tracking the overall rate of inflation for 100 years, house prices began to hugely outstrip inflation in 1996. This run-up in house prices should have been hard to miss. It was reported in government data that were published quarterly. The fact that there was no corresponding increase in rents and that vacancy rates were rising through the bubble years should have been a serious warning that something wasn’t right in the housing market. The deterioration of mortgage quality in the later years of the bubble was a widespread joke among people in the real estate business.

It should also have been easy to see that the bubble was driving the economy. Residential investment went from an average of less than 4.5 percent of GDP in the prior two decades to a peak of 6.8 percent of GDP in 2005. This is the GDP data that are published quarterly. How does an economist not notice this?

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Ben Bernanke responded to Paul Krugman's post last week, which agreed with my argument that the main cause of the Great Recession was the collapse of the housing bubble rather than the financial crisis. Essentially, Bernanke repeats his argument in the earlier paper that the collapse of Lehman and the resulting financial crisis led to a sharp downturn in non-residential investment, residential investment, and consumption. I'll let Krugman speak for himself, but I see this as not really answering the key questions.

I certainly would not dispute that the financial crisis hastened the decline in house prices, which was already well underway by September of 2008. It also hastened the end of the housing bubble-led consumption boom, which again was in the process of ending already as the housing wealth that drove it was disappearing.

I'll come back to these points in a moment, but I want to focus on an issue that Bernanke highlights, the drop in non-residential investment following the collapse of Lehman. What Bernanke seemed to have both missed at the time, and continues to miss now, is that there was a bubble in non-residential construction. This bubble essentially grew in the wake of the collapsing housing bubble.

Prices of non-residential structures increased by roughly 50 percent between 2004 and 2008 (see Figure 5 here). This run-up in prices was associated with an increase in investment in non-residential structures from 2.5 percent of GDP in 2004 to 4.0 percent of GDP in 2008 (see Figure 4).

This bubble burst following the collapse of Lehman, with prices falling back to their pre-bubble level. Investment in non-residential structures fell back to 2.5 percent in GDP. This drop explains the overwhelming majority of the fall in non-residential investment in 2009. There was only a modest decline in the other categories of non-residential investment.

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