Big Bailouts, Little Debate
Behind the Scenes, What Were They Thinking?
As a business writer for the New York Times, I often bump into HBS classmates and alumni who ask me, in a whisper, “What’s the real story behind the economic crisis? There’s some hidden tale that explains everything, right?”
The answer, alas, is disappointing. The truth is, this mess is as bewildering to policymakers and professional observers as everyone else. But there is one kind of story that I have struggled to get into print — not because of censorship or confidentiality but because it’s so hard to properly convey. It explains how frequently small, almost casual choices made during this crisis have spawned disastrous consequences.
Take Fannie Mae and Freddie Mac, for example. When I began covering the companies in early 2008, it was an unquestioned assumption they had grown too large. So when Treasury Secretary Hank Paulson (MBA ’70) asked Congress for the authority to take them over, it was granted without much debate. I’ve spoken to almost every lawmaker, regulator, and executive who might have influenced that decision, and none indicated they lost much sleep over the choice.
Yet the chain of events sparked by it was calamitous. Investors became scared Paulson would take over Fannie and Freddie, so they refused to give the companies more cash, which pushed them closer to the edge of insolvency, which forced Paulson to take them over, which caused investors to figure that if Fannie and Freddie could fail then companies like Lehman Brothers were also at risk, which … well, you know where this is going.
The decision to let Lehman fail, we’re told by the decision-makers themselves, received only cursory debate. The judgment last year to invest in banks, rather than buy their toxic assets, emerged almost on the fly, rather than as the product of long, structured deliberation. As for the decision to let AIG pay out its controversial bonuses, regulators simply refused to address the issue until events had moved beyond their control. And going back even further, few people ever seriously debated whether it was a good idea for everyone to own a home, and so homeownership became a national obsession, fertilizing the roots of this mess.
I’ve spent a lot of time asking people why some of the most important decisions received such little discussion. Here’s the most convincing answer, repeated by politicians from both parties and players all over Wall Street: When a crisis like this one first appears, it’s obvious only to a handful of people. And the steps required to snuff it out are onerous, painful, and radically unpopular among the masses, who don’t realize how bad things are about to become. So, in the words of one very senior policymaker, “we must wait for a widespread panic to solve the political obstacles that are preventing us from acting.”
I’m also often asked whether we’ve learned our lesson. To which I can confidently answer: Of course not. We’ve lived through a series of bubbles in the last fifteen years — Internet, housing, private equity, credit, emerging markets — and the only lesson we’ve taken away is that when each one bursts, an eager audience moves on to the next. Those specific bubbles won’t reinflate, but something else will.
Why am I so certain? Because only a genuinely widespread and profound panic could change the attitudes and politics that caused this mess. And while things are bad, they are a far cry from the unemployment and despair of the Great Depression. As evidence, let me point to the question I get most frequently these days: “What’s hot? Where can I earn it all back?” The query represents a dogged belief in the future. Almost everyone is ready to chase the next big thing, no matter how badly they’ve been burned. That optimism has filled HBS’s classrooms and coffers, Wall Street’s accounts, and, sadly, Bernie Madoff’s pockets. And this nation is nothing if not endlessly optimistic. The current situation may be painful and ugly, but we will survive, for better or worse, intact.
— Charles Duhigg is a staff writer and award-winning investigative reporter at the New York Times.