Back in New York, on the floor of the Stock Exchange, I was hearing a lot of frustration over the piecemeal solutions. People were ready for a comprehensive answer. They didn’t want to sit there week after week and watch the next bank fail, and the next bank fail. Everyone was looking to Washington to show leadership.
“Even though we said we needed an overall strategy, the truth is, we were not of one mind on what that overall strategy should be,” Lazear acknowledged. “It took some time for that to evolve. In retrospect, it would have been better if we’d handled it in a smoother fashion, but it was a war, and like all wars, things don’t always go exactly as you plan them. There was an enemy out there. In the end, fortunately, we got it right, and I think TARP was an important component in getting things back on track.”
There was no real controversy about TARP at the White House, but the prospect of TARP kicked up some dust on the campaign trail. The administration tried not to be distracted by the presidential race, but there was some concern that politics would sideline their efforts. When McCain appeared on the Today show, taking an antibailout position, Paulson got on the phone and talked him down. Barack Obama was more publicly supportive of Paulson’s efforts, but there was still a lot of confusion in the country about the meaning and necessity of TARP. The first time it came up for a vote in Congress, it fell short.
“I remember having a meeting with the president right after it failed,” a White House source told me. “We all got together in the Roosevelt Room, and the president said, ‘Look, we’ve got to take another shot at it. We can’t have this happen. We got to go for it.’ So that was the week where we worked the stuff out.”
The president’s economic team fought back hard against the skeptics. They believed it was time to take a bold chance, and they knew that if they didn’t do it, they might end up regretting it later. “It might have been unnecessary,” Lazear said with the benefit of hindsight, “but we’ll never know. In my view, it was necessary, and it didn’t cost the taxpayers very much. Most of the money was repaid. Meanwhile, it was extremely important to get capital into the financial sector to make sure that the pan was strong enough to withstand all the popping going on inside.”
The pushback from some free-market capitalists was essentially this: if you believe in free markets, companies should be able to thrive and fail as a result of their own actions. If a firm takes on too much debt and is on its knees, it is appropriate for that firm to go down, with the assets being acquired by another firm. The difference here was that so many firms—AIG in particular—were not so much too big to fail as they were too connected to fail. White House economic adviser Keith Hennessey told me that the “intent was to get at the root of the problem. The president’s instinct was not to intervene in the markets unless it was absolutely necessary.” But the opinion was growing that it was, indeed, just that.
Testifying before the House Financial Services Committee, Paulson stressed that it was essential that the federal government have the power to intervene to save the nation from financial collapse. He added that it was not just a national issue anymore; it was global. In a two-day period at the end of September, the governments of Ireland, the UK, Belgium, France, and Iceland were forced to step in and prevent the failure of financial institutions.
Even with the government plan, Ken Rogoff, the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University, predicted many bank failures. “Unless the Treasury decides to buy out every bank, we’re going to see more consolidation,” he told me on Closing Bell. “The industry is coming from a very bloated place—not just bad debt, but the business model itself. I anticipate we’ll change the whole way of doing business.”
The well-respected economist and author Amar Bhidé also thought TARP was a terrible idea. “I have enormous confidence in the institutions of America,” he told me, “and I hope they will override the mistakes individuals make. But this whole business of TARP reminds me a lot of the WMD business in Iraq: ‘Oh my God, just trust us. There are these WMDs, and unless you give us the authority now and right now to bomb them, disaster will befall us all.’ Giving Wall Street or Detroit or the banks money with virtually no personal accountability erodes the legitimacy of the system. Ultimately, the great strength of this economy is the belief that the game is not rigged, that we can all get ahead if only we try harder. The destruction of that belief could be an awful consequence of this desperate shoveling of money.”
There was tremendous relief at the Treasury Department and the White House when TARP passed on October 3, and the government immediately injected $250 billion into the system to stabilize banks. But the relief was extremely short lived. One White House official shuddered recalling what happened next. “After TARP passed, the market fell five hundred points in an hour—which was totally bizarre because this was supposed to be good news. When that happened it was the closest we came to—not panic, but feeling the situation was quite desperate.”
In the blame game, one factor kept coming up over and over again—the repeal of
