Twenty of the power players involved in the response to the 2008 global economic crisis met on October 29 at the Spertus Institute in downtown Chicago in order to discuss lessons learned from the crisis. Mayor Rahm Emanuel, former Treasury Secretary Larry Summers, and billionaire investor Charles Schwab were among those who participated in panel discussions in front of an audience of two hundred invited guests and members of the press during the daylong event. Political tensions ran high at various points during the day, with officials from both parties trading jabs over differences in how the response to the crisis ought to have proceeded. The discussions centered on the bailout of the banks (known as the TARP program) and the Dodd-Frank bill, a compendium of financial regulatory reforms intended to prevent another crisis from occurring. The participants agreed on two things: that the response to the crisis was crafted quickly, and that no one anticipated the extent of public outrage over the bailout of major Wall Street firms.
None of the officials present at the symposium anticipated how deeply unpopular the Troubled Asset Recovery Program (TARP) —the plan approved by Congress to use government funds to keep major financial institutions solvent—would prove to be. Former Congressman Barney Frank (D-MA), the co-author of the financial reform bill of 2010, said that “TARP was the most successful, wildly unpopular program in US history.” Former Treasury Secretary Henry Paulson added, “No one could estimate how unpopular it was,” and explained that the public could not readily grasp the enormity of the crisis that could have befallen the United States had Congress failed to act.
TARP was conceived and approved in just two weeks, breakneck speed for such a large appropriation. Perhaps the most telling comment on the response to the crisis came from Mayor Emanuel, who said, “Let’s be honest, we were going by the seat of our pants.” Other participants in the panel discussions highlighted the uncertainty about the crisis that persists to this day. Former Treasury Secretary Larry Summers noted, “Anyone who speaks with complete confidence on (the crisis) is a fool.” Summers also remarked that “very little of modern macroeconomic theory was useful in constructing the response,” demonstrating that officials relied more on gut instinct than on economic theory in crafting a response to the crisis.
Panelists conveyed to the audience that they understood the public’s attitude. Secretary Paulson explained that, from an outsider’s perspective, it appeared as if taxpayer money was going to help those who spent and invested recklessly—an anathema to the American notion of fairness. Ed Lazear, a top White House economist for the Bush Administration, emphasized that the goal of TARP was not to bailout Wall Street, but rather to protect against a total credit freeze. There was broad consensus across Wall Street and Washington that the most effective solution would have been a bailout of troubled homeowners, but the public would not have supported a “redistributionist” system, in the words of Neel Kashkari, a former high-ranking official at the Treasury Department.
In July 2010, Congress passed a broad financial reform bill known as Dodd-Frank, named for the bill’s sponsors, Representative Barney Frank (D-MA) and Senator Chris Dodd (D-CT), both of whom participated in the symposium. Under Dodd-Frank, financial regulators were given broad authority to crack down on reckless practices in the hopes of ending the system of bailouts of banks deemed ‘too big to fail.’ Former SEC Chair and panelist Mary Schapiro stated that the SEC is now better equipped to handle cases of financial recklessness than ever before thanks to Dodd-Frank, even though less than half of the reforms have been fully implemented. Other reforms in Dodd-Frank include the institution of stress tests for banks in order to signal problem areas on bank balance sheets. It remains to be seen whether the reforms will prevent future economic crises.
“Economic error,” Larry Summers said memorably at the symposium, “occurs when you try to do today what you should’ve done yesterday.” Tuesday was a day for retrospection, to take stock of what has been learned in the past five years. But Wednesday, and every day thereafter, should be focused on preventing the next crisis. It may be just a few months away.