September 11, 2015
We are approaching the 7th anniversary of the collapse of Lehman. As folks recall, this led to a massive financial crisis, with normal interbank lending freezing up, and most of the country’s major banks teetering on the brink of bankruptcy. This was when then chair of the Fed Ben Bernanke, along with Treasury Secretary Hank Paulson, and New York Fed bank president Timothy Geithner, ran to Congress and demanded an immediate bailout of the banks, which was known as the TARP. The alternative was economic collapse.
When the House of Representatives shocked the elites by turning down the bailout, in response to a massive outcry against Wall Street across the country, the elites doubled down. Major news outlets like the New York Times, National Public Radio, and the Washington Post started telling us that we would see another Great Depression if the banks didn’t get their money. The people who questioned this view were mocked as know-nothings (sort of like the people who warned about the housing bubble before it burst).
Anyhow, as we all know, the House turned around for a voted for a new bill larded with special interest pork, the banks got trillions of dollars in below market interest loans, explicit government guarantees of trillions more in assets, and Treasury Secretary Timothy Geithner’s pledge that there would be no more Lehman’s, meaning that no matter how badly insolvent a major bank might be, the government would not allow its collapse.
As a result, the major banks are all back on the their feet, the Wall Street honchos are richer than ever, and they are again running around telling us how we should run the economy and the country. (That mostly involves giving them more money.)
Giving huge amounts of taxpayer dollars to the richest people in the country doesn’t sound good to most folks. This is especially likely since the Wall Street crew were the ones whose incompetence and/or corruption gave us the housing bubble, the collapse of which gave us the 2008–2009 recession. Most working people still have not recovered from this downturn. But hey, at least they saved us from the Second Great Depression.
Paul Krugman tells us today why that is not true. The Second Great Depression is not the explicit topic of his column, but he effectively describes how we could have avoided such a fate even if we had allowed the market to work its magic on the Wall Street banks.
Krugman is discussing Japan and its halting efforts to fight the deflation and economic stagnation that have afflicted the country over the last two decades. He tells readers:
“What’s remarkable about this record of dubious achievement is that there actually is a surefire way to fight deflation: When you print money, don’t use it to buy assets; use it to buy stuff. That is, run budget deficits paid for with the printing press.”
Get that? Print money and have the government spend it. That’s a surefire way to fight deflation. This would be true even if Citigroup, Bank of America, Goldman Sachs and other bankrupt banks had been allowed to go under. Printing money and having the government spend it still would have been a surefire way to boost the economy. Maybe we would have had to print and spend more money, but we do know how to do that.
In short, there is no logic to the claim that Bernanke, Geithner and the rest saved us from a Second Great Depression. They kept the Wall Street banks alive. They also helped to support a recovery, which doesn’t look bad if we grade on a curve (we’re doing better than the euro zone or the UK), but still has left us with by far the worst downturn since the Great Depression.
So there clearly is reason for the folks on Wall Street to celebrate the seven years since the collapse of Lehman. They still have their jobs and many are ridiculously rich. For the rest of us, the story is not nearly as good.
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