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Ben Bernanke (right) and Timothy Geithner (background) say they did what they had to do to “prevent the collapse of the financial system and avoid another Great Depression.” But what they really did was teach middle-class families a grim lesson.

By Zach Carter

Ten Years After The Financial Crisis, The Contagion Has Spread To Democracy Itself

Tim Geithner, Ben Bernanke and Hank Paulson dealt a catastrophic blow to public faith in American institutions.

By the time Lehman Brothers filed for the largest bankruptcy in American history on Sept. 15, 2008, the country had been navigating stormy global financial waters for more than a year. Bear Stearns had been rescued in a bailout-facilitated merger with JPMorgan Chase, and the government had nationalized housing giants Fannie Mae and Freddie Mac. For anyone paying attention to the financial system, the situation had been quite dire for a long time.

And yet throughout the mess, the Federal Reserve and the U.S. Treasury had been permitting the largest banks in the country to funnel as much cash as they wanted to their shareholders ― even as it became clear those same banks could not pay their debts. Lehman itself had increased its dividend and announced a $100 million stock buyback at the beginning of 2008. Insurance giant AIG paid its highest dividend in company history on Sept. 19, 2008 ― three days after the Federal Reserve handed the insurance giant $85 billion in emergency funds. According to Stanford University Business School Professor Anat Admati, the 19 biggest American banks passed out $80 billion in dividends between the summer of 2007 and the close of 2008. They drew $160 billion in bailout funds from the U.S. Treasury, and untold billions from the Fed’s $7.7 trillion in emergency lending.

When poor people engage in such activity, we call it looting. But for the princes of American capital and their lieutenants at the Fed and the Treasury, this was pure crisis management.

Today, Ben Bernanke, Hank Paulson and Timothy Geithner insist they did what they had to under conditions of extreme duress. Mistakes were made, the government’s former top financial overseers acknowledge in a recent piece for The New York Times, but they did ultimately “prevent the collapse of the financial system and avoid another Great Depression.”

Except they didn’t really rescue the banking system. They transformed it into an unaccountable criminal syndicate. In the years since the crash, the biggest Wall Street banks have been caught laundering drug money, violating U.S. sanctions against Iran and Cuba, bribing foreign government officials, making illegal campaign contributions to a state regulator and manipulating the market for U.S. government debt. Citibank, JPMorgan, Royal Bank of Scotland, Barclays and UBS even pleaded guilty to felonies for manipulating currency markets.

Not a single human being has served a day in jail for any of it.

The financial crisis that reached its climax on that Monday morning 10 years ago was not fundamentally a problem of capital, liquidity or regulation. It was a crisis of democracy that taught middle-class families a grim lesson about who really mattered in American society ― and who didn’t count. 

The failures of the crash and the bailout were not technocratic failures. They were about power. 

University of Georgia law professor Mehrsa Baradaran

For most of American history, financial policy was a central political battleground. There was the feud between Thomas Jefferson and Alexander Hamilton over Revolutionary War debt; the Whiskey Rebellion; Andrew Jackson’s assault on the Second Bank of The United States; the greenbacks Abraham Lincoln issued to help finance the Civil War; William Jennings Bryan and the cross of gold; the creation of the Federal Reserve; FDR’s New Deal. These were among the most heated political issues of their day. And they were all understood to be questions of power and democratic accountability, not merely matters of growth or efficiency.

But beginning in the 1950s, the United States increasingly came to understand finance as apolitical ― something best handled by technocratic experts insulated from the passions of a democratic electorate. This idea went by different slogans ― “the liberal consensus,” “the great moderation,” “central bank independence” ― but they all amounted to the same thing: The economy was nonideological. The decisions made by experts tending to the financial machine were were strictly tactical. Any mistakes were a matter of pulling the wrong lever or setting a dial too high.

The financial crisis exploded this myth. “The failures of the crash and the bailout were not technocratic failures,” says University of Georgia law professor Mehrsa Baradaran. “They were about power.”

Lehman would be the only major American financial institution to out-and-out fail in the crisis. Everyone else was bailed out on generous terms that not only protected their creditors, but their shareholders and ― with the exception of AIG ― the jobs of their top executives. Criminals who broke the law were shielded from prosecution.

Here’s what happened to everyone who didn’t work for a bank: As a percentage of each family’s overall wealth, the poorer you were, the more you lost in the crash. The top 1 percent of U.S. households ultimately captured more than half of the economic gains over the course of the Obama years, while the bottom 99 percent never recovered their losses from the crash.

These were policy choices, not economic inevitabilities. Under presidents George W. Bush and Barack Obama, the government saved the financial sector by pumping it full of cash, and then taking unprecedented steps to elevate the value of financial assets. For anyone who owned stocks and bonds (otherwise known as rich people), this was great news.

But there was no similar commitment to housing ― where middle-class people held their wealth. Instead, over 7.7 million homes were lost to foreclosure between 2007 and 2016, while millions more found the source of their savings ― home equity ― wiped out.

It could have been different. When Obama took office, he promised to spend up to

$100 billion from the bank bailout to prevent foreclosures. He ultimately spent just

$21 billion. But the dollar amount was only a fraction of the failure. The bailout gave

the government unprecedented authority over the foreclosure process ― it could

have required banks to adjust monthly payments or reduce debt burdens for

homeowners in distress. Instead, as Geithner put it, the foreclosure relief plan was

designed to “foam the runway” for banks coming in for a hard landing. It allowed

banks to slow down the pace of foreclosures, but did not actually help families keep their homes.

Geithner hadn’t set the dials wrong. He had made a choice about who deserved the government’s full attention and how aid would be distributed. And he had done it

without any meaningful input from Congress, or even a public debate.

“It led to a breakdown and a lack of trust in institutions,” says Admati. “What we

witnessed here … is kind of ominous. It raised a lot of questions about who controls

society ― corporations or the elected government.”

ERIC VIDAL / REUTERS

Far right nationalists like Hungary’s Viktor Orban have a seen a resurgence in Europe and the United States, fueled by bailout-and-austerity packages crafted by technocratic leaders.

Financial crises foment authoritarianism. In 2015, a trio of German economists studied financial panics in 20 advanced economies dating back to 1870, and concluded that

they almost always result in major gains for “far right” political parties after a lag of a

few years. The most pressing question for policymakers facing a banking meltdown

is not, “How do we restore our banks to profitability?” but, “How can we prevent

social collapse?”