Did Obama Save The World From A Second Great Depression?

That is a claim made on Monday by Robert J. Samuelson in the Washington Post, who argues that while he "had plenty of help, including from his predecessor, George W. Bush, and from top officials at the Treasury  Department and Federal Reserve," his bailout of General Motors and Chrysler and his projecting "reason and calm when much of the nation was fearful and frazzled," and, oh so briefly, "He also championed a sizable budget 'stimulus'," not to mention his somehow generating a stock market boom were all crucial to the turnaround.  OK.

Now I am usually denouncing RJS on this site, but I am not going to do so too  much here today, even though I shall express some problems with this.  For better or worse, I am more going to pick on my old friend Dean Baker, who is all over RJS on this, just dumping on him like we both usually do.  But as RJS is a bit off, so is good old Dean, who spends most of his energy denouncing the TARP bank bailout, which RJS accurately notes was put in place by Bush, not Obama, so not relevant either way to a judgment on what Obama did or did not do (although he did not undo it, and did support it when Bush proposed it, so grant that to Dean).

Dean has long argued that TARP should not have been done and that instead we should have let the big banks fail, paying off depositers with FDIC funds, although those would have run out quickly.  But then he also says Obama could have run a much bigger fiscal stim than he did, even though most think he got about as big a one as he could given the political views in the Congress at the time, and letting FDIC go bust would need to have been undone by Congressional action, which may or may not have been forthcoming.  However, if depositers could have been paid, maybe we could have restructured the bankrupted parts of those big banks without too much turmoil or negative repercussions throughout the economy.  But that is not at all certain, and we shall never know.  After all, what happened in 1931 that turned an unpleasant recession into the Great Depression was indeed a massive financial collapse involving a global set of related bank failures, starting with the Creditanstalt in Austria in May and then spreading through Eastern Europe and then through Germany and France and Britain, finally to hit the US by the end of the summer, with the Fed doing nothing about it, and there also being no  FDIC to save the depositers who lost big when their banks failed.

As it is regarding Obama and the banks, probably what he did that stabilized the financial system, and was not a financial gimme to the banks as TARP was (although from the standpoint of the taxpayers, TARP was a money maker, just barely), was the stress tests that happened in March, 2009, and went well, and seem to have coincided with a turning around of many markets and a lowering of major risk spreads in the economy.  It is possible that this was at least as important as the fiscal  stimulus (which the expectation of it kicking in also hit about that time)  for helping to  turn around the economy, although Samuelson said nothing about those stress tests, even though they were probably more important than the auto company bailouts he makes a big fuss about.

So, if  neither RJS nor Dean really has it down as to what kept us out of a second Great Depression, and indeed that is what I am arguing, what was?  Oh, that would be the actions of  Ben Bernanke and his Fed colleagues at the precise instant of the Minsky Moment on the weekend of September 18, 2008, actions not widely known or recognized, but where indeed Bernanke showed his knowledge  of the events of 1931 and acted to avoid that outcome. As the crash unfolded over  the weekend, the most dangerous part of it came in Europe, where several of the biggest banks, including Deutsche Bank and BNP Paribas, were in danger of collapsing after the AIG branch in London went down.  The ECB was under pressure trying to  buy up their stuff made junk by the AIG collapse and was failing to do so as a crash of the euro began, with European (and other) money rushing into the safe haven of the US dollar (this involved similar events in some non-European nations as well).

The decision was made to put on the Fed balance sheet in swaps, where one can find this in the historical record with it labeled as such, about $600 billion of this (mostly) euro junk that the ECB was having trouble absorbing.  This action after that weekend stabilized the euro and ended the immediate crisis, which indeed threatened a full-scale global financial meltdown a la 1931.  These balances were then quietly rolled off and sent home after the crisis ended over about a six month period to be replaced by US mortgage-backed securities  (MBSs).  I  first heard of this from the inimitable Perry Mehrling, and one can find a pretty good account of it in Neil Irwin's The Alchemists, but very few people know about it, with most like Dean and RJS getting all worked up about such secondary matters as TARP and the fiscal stimulus.  Without that weekend save, these would have been flying against a much deeper crash and plunge into depression than they were.

BTW, it is even harder to separate out what was responsible for what as the ending of the rolling off the Fed balance sheet of all that eurojunk came about the same time in March,2009 as did the stress tests and the passing of the fiscal stimulus.  Good times would be coming one way or another, even if it would take a long time given the depth of the fall.

Why do so few people know about this?  Well, this was one of those deals involving confidence,  or the fear of losing it.  Folks at the Fed, who got very little sleep on the weekend of Sept. 18, 2008, did not want to aggravate the crisis coming out of Euorpe (which in turn was triggered by events in the US), so they wanted as little publicity as possible about the fact that there was such a serious world-economy-threatening crisis, as well as also not wanting to let people know that they were doing anything about it, with the extremely bad condition of the assets the Fed was putting on its balance sheet to be especially not made known, buried under the obscure label of "currency swaps."  And the fact that their actions were successful, arguably then reinforced later by various actions discussed by Samuelson and Baker, led to those assets becoming less toxic over the next few months and thus able to be quietly sent back to Europe where they came from.

Needless to say, neither Obama nor Bush had doodley-squat to do with those events or the decisions by the Fed that probably were more  important in saving the world from a second Great Depression than anything done later by them or anybody else.  Credit should be given where it is due on this.

Addendum, 1:30 PM, Dec. 21:

A couple of further remarks.  Much of what has Dean Baker and many others annoyed about TARP was that a bunch of bad guys got away with it.  He and many others, including many who supported Bernie over  Hillary and some who voted for Trump over her as well (even though Trump is dumping on them by appointing Goldman Sachs types and other billionaires to his cabinet), have been unhappy that TARP saved the behinds of these big CEOs, whose Big Four banks look now "too big to fail"and sitting very pretty.  (Probably the stupidest thing Hillary did  was giving those paid speeches to those Wall Street fat cats).  I see two related but separate issues here, none of them having to do with the Fed swap bailout of Europe,and a third further unmentioned but related issue also.

One is  this matter of punishment and retribution.  So, I regret indeed that Obama did not have the DOJ or somebody go after some of these high level CEOs.  Many of them clearly guillty guilty. guilty.  There was a danger this could have turned into an excessive witch hunt, but as it was a bunch of guilty people got off very scot-free, in some cases a lot richer than they started out as.

I suspect that the decision not to go after them was related to the decision not to break up those biggest banks.  That in turn reflected a policy coming from the Fed and predating the full crash, that it was preferable to have larger banks take over smaller failing ones rather than let those smaller one outright fail.  Some of this may have been a matter of trying to prop up confidence, e.g. Bear Stearns, although some of it may have also been wanting to avoid putting the limited FDIC funds in danger by having to deal with too  many bank failures.  Of course, this led to the increasing size of these  behemoths that bought up these banks,with some of them suffering as a result, still not fully digesting what they bought, with Bank of America especially sticking out on this.  There certainly is a case now for busting up some of these big banks, especially now that we are way out of the old danger zone. However, at the time, even Dean admits that there would have been a major decline if the banks had all been left to fail, not just Lehman, with his invoking a not-likely-to-happen World War II level fiscal stimulus to overcome the aftermath of that.

The third issue, not  mentioned by either Samuelson or Baker,although Dean has written about it in the past and is fully aware of it, is what to do about all the homeowners who ended up with underwater mortgages, at one point as many as about a quarter of all mortgage holders.  These people clearly took a big hit, and RJS vaguely mentioned them when he referred in his article to "asset value losses," which clearly went beyond the stock market.  This matter is still a hangover from the Great Recession, with many people still in this underwater condition, which is most depressing.  Their condition of course was related to the problems in the banks and financial markets more broadly, but has persisted even after the bank crisis settled down.  At times Obama and others made noises about doing something for  these people, but there was always political resistance and not just from Republicans.  Such moves were basically unpopular because of annoyance by mortgage holders who were not underwater, many of whom saw those in the underwater situation as being personally responsible for their own financial problems.  Why should the rest of us bail out these fools who took  out overblown mortgages on overly highly priced real estate?  I cannot answer that one,but I note that the failure to bail these people out, who arguably were more deserving than the big banks, has been a major drag on the recovery and still is.


Barkley Rosser