The Politics of Taking Credit

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One can imagine, though with difficulty, an Administration spokesman explaining the nation's recent economic history as follows:

"Because of serious errors of monetary policy, excessive deregulation of the banking industry, a belief there would never be another depression, a failure to understand the full significance of the bursting of the housing bubble, and mistakes in responding to the financial collapse of last September (such as allowing Lehman Brothers to collapse and thinking the banks' problem was one merely of liquidity, rather than of solvency) by the troika that managed U.S. economic policy in the final two years of the Bush presidency--Ben Bernanke, Timothy Geithner, and Hank Paulson--the economy took a disastrous dive.

"Still, by the end of October, the members of the troika had regained their composure and taken a series of measures that avoided a complete collapse of the banking industry and a liquidation of General Motors and Chrysler.

"When the new Administration took office in January, the troika remained in charge of economic policy but with the substitution of Lawrence Summers for Paulson. Economic policy since then has been largely continuous with the policy of the previous Administration, not surprisingly given the continuity of the economic leadership. The stress tests and other measures relating to the financial sector taken by the new Administration would undoubtedly have been undertaken by the previous one had its time in office not expired. Even a large stimulus program might well have been launched by the previous Administration, despite vociferous Republican opposition to the program when it was proposed by a Democratic President and Congress. That opposition reminds me of the dog who barks ferociously at passersby when he is behind a fence, but take away the fence and he quickly becomes quiet. When the stimulus program was proposed, the economy was in dire straits and the bank bailouts and related measures focused on the financial sector (such as pushing down the federal funds rate almost to zero) had not arrested the decline. And it's not as if the Bush Administration had been averse to spending and deficits.

"On the whole the measures taken by the two Administrations have probably contributed to the bottoming out of the economic downturn, though it is impossible to measure their impact relative to the impact of natural economic forces, such as the depletion of inventories, the modest expansion in exports, the wearing out of some durable goods, and falling prices, which have lured timid consumers out of their burrows. It is impossible to separate out the effects of the different recovery measures or determine which Administration did more to save the economy--a meaningless question since it is uncertain whether either Administration did anything important that the other would not have done." 

But this of course is not how politicians speak. President Obama in his speech of September 14 on the economic crisis acknowledged that "Congress and the previous administration took necessary action in the days and months that followed. Nevertheless, when this administration walked thorugh the door in January, the situation remained urgent." And so "this administration...moved quickly on all fronts, initializing a financial stability plan to rescue the system." (I assume "initializing" is a misprint for "initiating.") The implication is that, the previous Administration having failed to stop the rot, the new Administration had to move quickly to create a financial stability plan. In fact all the new Administration did, apart from the stimulus and an ambitious but not terribly successful mortgage-relief plan, was to continue the policies of the previous Administration.

The speech goes on to describe the recovery program, and while acknowledging that "the work of recovery continues" states that"we can be confident that the storms of the past two years are beginning to break." The implication is that they are beginning to break because of the Administration's recovery program, but actually they are beginning to break as the result of the natural recuperative strengths of the economy plus the combined efforts of successive administrations.

The speech then turns to the causes of the economic crisis, and naturally there is nothing there about failures of government policy, in which Bernanke and to a lesser extent Geithner and Summers were implicated. Such an acknowledgment would strike a discordant note, and not only because the President has announced that he is reappointing Bernanke as chairman of the Federal Reserve and because Geithner is his Secretary of the Treasury (not only held over, but promoted from his job as president of the Federal Reserve Bank of New York.) The Administration wants to enlarge the powers of the Fed, yet the Fed under Alan Greenspan was a major cause of the economic crisis because of its bubble-blowing monetary policy, and the Fed under Bernanke failed to detect or arrest the crisis until it was almost too late; acknowledgment of these errors would raise questions about the appropriateness of rewarding the Fed for its failures by giving it enhanced powers.

Blame has to fall somewhere so in the President's speech it falls on the "reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kill and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall." But of course American taxpayers will be there next time to break their fall, because according to Bernanke the bank bailouts were necessary to avert a second Great Depression and will be necessary to do the same thing the next time we're in the same fix. And nobody in a position of authority on "Wall Street" takes risks without regard for consequences. The problem is that they do not have regard for consequences for the economy as a whole, because that is not the business of business. That is the business of government. But rich people are the natural scapegoats for economic distress.

The rest of the speech is a summary of the Administration's program of financial regulatory reform, announced in the Treasury report of June 17. One thing that is new, however, is a confusing discussion of "resolution" authority. The term refers to the streamlined bankruptcy process that the Federal Deposit Insurance Corporation uses on insolvent commercial banks and thrifts. The big "nonbank banks" like Lehman Brothers that got into such serious trouble last year were not commercial banks, so that when the government refused to save Lehman Brothers it had to declare bankruptcy. Since its assets were scattered all over the world, it found itself in separate bankruptcy proceedings in different countries, causing severe problems of coordination that have yet to be overcome.

That is a pity, but the suggestion in the speech that if only there had been authority to "resolve" the insolvency of the nonbank banks the taxpayer would have been spared having to bail them out doesn't make sense. Especially with regard to Lehman, because it received no taxpayer money. But it also doesn't make sense with regard to the nonbank banks that did receive bailouts. Broke is broke, whatever the mechanics of liquidation or reorganization; and if you don't want to have an insolvent banking system you have to bail out the broke banks. No one thinks bankruptcy a bad way to "resolve" a bankrupt auto manufacturer; the bankruptcies of GM and Chrysler were orderly and prompt--yet the government still poured in tens of billions of dollars to save them from liquidation.

Moreover, whatever changes we make in our procedures for winding up a bankrupt financial institution will not deprive foreign countries of control over the assets of such an institution that are located in foreign countries.

Another curious novelty in the speech (I think it's a novelty) is the suggestion that bonuses for senior executives should be subjected to a vote by the company's shareholders. What would that do? Probably the senior executives would substitute higher salary, more stock options, bigger severance packages, and other forms of compensation, for bonuses. And that would prevent the next financial crisis?

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Richard A. Posner

Richard Posner is an author and federal appeals court judge. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. More

Richard A. Posner worked for several years in Washington during the Kennedy and Johnson Administrations. He worked for Justice William J. Brennan, Jr, the Solicitor General of the U.S., Thurgood Marshall, and as general counsel of President Johnson's Task Force on Communications Policy. Posner entered law teaching in 1968 at Stanford and became professor of law at the University of Chicago Law School in 1969. He was appointed Judge of the U.S. Court of Appeals for the Seventh Circuit in 1981 and served as Chief Judge from 1993 to 2000. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. His academic work has covered a broad range, with particular emphasis on the application of economics to law. His most recent books are How Judges Think (2008), Law and Literature (3d ed. 2009), A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). He has received the Thomas C. Schelling Award for scholarly contributions that have had an impact on public policy from the John F. Kennedy School of Government at Harvard University, and the Henry J. Friendly Medal from the American Law Institute.
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