A Meltdown of Public Trust

Philip A. Wallach says federal agencies ruined their own credibility to save the 2008 economy.

To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis

by Philip A. Wallach

Brookings Institution Press, April 2015

To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis by Philip A. Wallach.WHAT IT'S ABOUT In this detailed chronicle of the federal response to the 2008 financial meltdown, Wallach argues that, in their efforts to save the economy, the Treasury Department, the Federal Reserve, the FDIC, and other agencies undermined their own credibility in the public's eyes. Wallach analyzes specific actions by federal regulators, identifying occasions on which they took what he argues were excessive liberties with their legal mandates, as well as instances in which players such as then-Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson were less than forthright with the American public or with Congress about what they were doing. For example, while Congress claimed that the Troubled Asset Relief Program was meant to help both financial institutions and homeowners, Paulson directed most of the money to the former, not the latter, which produced a backlash against the bailout. More broadly, Wallach uses the crisis as a case study to illuminate the perils government faces when it acts in times of emergency.

TARGET D.C. AUDIENCE Policymakers; historians; legal experts; regulators; politicians or pundits seeking to argue for or against the legitimacy of the government's actions during the financial crisis.

BEST LINE "Predicting the government's choices had become a matter not of knowing trans-parent rules or standards that it would apply but of intuitively understanding the thought processes of top decisionmakers—a situation that increasingly and precariously made legitimacy contingent on the success of decisions rather than appeals to normal institutional processes."

TO BE SURE Although he is critical of the ways in which the Bush and Obama administrations both stretched their authority and executed their strategies, Wallach largely supports the bailout overall, and he generally characterizes actions taken by Paulson and others as having been for the greater good of the economy.

ONE LEVEL DEEPER Both populists and establishmentarians should consider reading Chapter 6, in which Wallach chronicles Elizabeth Warren's time overseeing the financial bailout—and how what should have been a simple bureaucratic job became a platform for her and for the resurgence of populism on the left.

THE BIG TAKEAWAY When government responds to a crisis, leaders must ensure not only that the right actions are taken, but also that those actions are pursued in a manner that bolsters rather than erodes the public trust.