October 3, 2021

by Steve Stofka

This week I enjoyed a video (CFR, 2019) on the 2008 financial crisis that aired on HBO in 2019. VICE reporters interviewed former Fed chairman Ben Bernanke, and former Secretaries of the Treasury Hank Paulson and Tim Geithner, key policymakers during the crisis. They regretted the devastating effect that the crisis had on so many families. They understood the public anger at the bailouts of Wall Street. They attributed the rise of populism to the public perception that there was one rule for the elites on Wall Street who had created the crisis and those on Main Street who suffered the consequences. As I watched the financial Trinity of Paulson, Geithner and Bernanke, I thought they still don’t get it.

A prominent feature of the global political system is anarchy, the lack of a central authority governing all the states. Until the 2008 crisis, the public thought that national institutions supervised the global financial system to make sure that the players in that system did not endanger the public. The Trinity were in control of institutions that were charged with the safety of the public trust. Each of them believed in a light supervisory touch, thinking that the financial system was mostly self-regulating because the players kept each other in check. The crisis demonstrated the fault of that thinking.

Realism is one of the two dominant methods of analysis in international relations. Realists focus on the strength and distribution of military power among states who have competing interests. The force in the financial system is not military weapons but the ability to leverage capital. National governments bestow those weapons of power on their financial institutions. Each of the big investment banks serves their own interests and are supposed to follow the rules. Central banks and supervisory institutions rely on a balance of power between the big financial players to self-regulate this system.

In the global political system, there is no central ruling authority. In the American financial system, the financial industry lobbies against any oversight or regulatory power. They want anarchy – to be left alone until their risk taking reaches critical mass and threatens the global system as it did in 2008. Then the players rush to the Fed or the White House for a bailout. Despite the financial power that Paulson, Bernanke and Geithner had at their fingertips, they felt impotent during the crisis. It was not comforting to watch each of them make gestures of futility as they spoke, arguing that they had to follow the law. Why? The people who ran the investment banks that took extraordinary risks did not play by the rules.

As the crisis unfolded, the public watched the anarchy on display. The big investment banks have the equivalent of nuclear weapons given to them by their governments and there is little effective supervision. The Trinity blamed “liar loans” for contributing to the crisis. Prospective homeowners were told by mortgage companies that they did not have to document their income. Many low-income families welcomed the chance to own their own home for the first time in their lives. They believed the government was supervising these mortgage companies because the mortgages were being bought by government institutions. Even if it sounded too good to be true, the government must know what it was doing. That belief was about to be shaken to its foundation.

The 2000s were marked by a string of government follies. The public was shocked to learn that the nation’s security agencies had been alerted to the threat of the 9-11 attackers. A lack of communication and coordination between agencies had let the attackers slip through the security net. Following that revelation, the Department of Homeland Security was created to coordinate federal agencies. In 2002, the public learned that no one had been supervising the nation’s largest accounting firms. As the giant Arthur Anderson imploded, investors wondered whether the financial statements of the nation’s largest companies were fiction. Enron and some dot-com companies blew up. After demonstrating American military power and technology in the invasion of Iraq, the mismanagement of the war became apparent. The fumbling federal response to Hurricane Katrina confirmed the impotence of the Federal government. Five consecutive years and five government failures.

After all that, the American public still trusted the imprint of the federal government on a mortgage. The financial crisis was the last in a string of government failures that caused a large loss of trust in government. Government institutions like the Fed and the Treasury had trusted Wall Street but not Main Street. Government had broken a bond of trust with the public and these three had been partly responsible for that broken pact. Breaking trust is difficult to understand or acknowledge.

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Photo by Aimee Vogelsang on Unsplash

CFR. (2019, May 01). Panic: The untold story of the 2008 Financial Crisis | full vice special report | HBO. Retrieved October 03, 2021, from https://www.youtube.com/watch?v=QozGSS7QY_U