I invited Greenspan to the White House for regular lunches. Dick Cheney, Andy Card, and I would eat. Alan would not. He spent all his time answering our questions. His grasp of data was astounding. I would ask him where he saw the economy headed over the next few months. He would quote oil inventories, changes in freight miles in the railroad industry, and other interesting statistics. As he rattled off the figures, he slapped his left hand against his right fist, as if to jar more information loose. When his position came up for renewal in 2004, I never considered appointing anyone else.
With Alan Greenspan.
When Alan sent word that he would retire in early 2006, we started the search for a successor. One name kept coming up: Ben Bernanke. Ben had served three years on the Fed board and joined my administration as chairman of the Council of Economic Advisers in June 2005. He was well respected by the staff and by me. Raised in a small South Carolina town, he was humble, down-to-earth, and plainspoken. Like me, he loved baseball. Unlike me, his team was the Boston Red Sox. He was able to distill complex topics into understandable terms. In contrast to some in Washington, the salt-and-pepper-bearded professor was not addicted to the sound of his own voice.
I liked to needle Ben, a sign of affection. “You’re an economist, so every sentence starts with, ‘On one hand … on the other hand,’ ” I said. “Thank goodness you don’t have a third hand.” One day in the Oval Office, I ribbed Ben for wearing tan socks with a dark suit. At our next meeting, the entire economic team showed up wearing tan socks in solidarity. “Look at what they’ve done,” I said to Dick Cheney. The vice president slowly lifted the cuff of his pants. “Oh, no, not you, too!” I said.
What stood out most about Ben was his sense of history. He was a renowned academic expert on the Great Depression. Beneath his gentle demeanor was a fierce determination to avoid the mistakes of the 1930s. I hoped America would never face a scenario like that again. But if we did, I wanted Ben at the helm of the Federal Reserve.
As Fed chairman, Ben developed a close relationship with the other members of my economic team, especially Hank Paulson. Ben and Hank were like the characters in
Their opposing personalities could have produced tension. But Hank and Ben became perfect complements. In hindsight, putting a world-class investment banker and an expert on the Great Depression in the nation’s top two economic positions were among the most important decisions of my presidency.
With Ben Bernanke (
I began my final year in office the same way I had started my first, concerned about a bursting bubble and pushing for tax relief.
In mid-2007, home values had declined for the first time in thirteen years. Homeowners defaulted on their mortgages in increasing numbers, and financial companies wrote down billions of dollars in mortgage-related assets. Council of Economic Advisers Chairman Eddie Lazear, a brainy and respected Stanford professor, reported that the economy was slowing down. He and the economic team believed we might be able to mitigate the effects with well-timed tax relief.
In January 2008, I sent Hank Paulson to negotiate a bill with Speaker Nancy Pelosi and House Minority Leader John Boehner. They hammered out a plan to provide temporary tax incentives for businesses to create jobs and immediate tax rebates for families to boost consumer spending. Within a month, the legislation had passed by a broad bipartisan majority. By May, checks of up to $1,200 per family were in the mail.
The economy showed some signs of resilience. Economic growth reports were positive, unemployment was 4.9 percent, exports had reached record highs, and inflation was under control. I was hopeful we could dodge a recession.
I was wrong. The foundation was weakening, and the house of cards was about to come tumbling down.
Early in the afternoon of Thursday, March 13, we learned that Bear Stearns, one of America’s largest investment banks, was facing a liquidity crisis. Like other Wall Street institutions, Bear was heavily leveraged. For every dollar it held in capital, the firm had borrowed thirty-three dollars to invest, much of it in mortgage-backed securities. When the housing bubble popped, Bear was overexposed, and investors moved their accounts. Unlike the run on First National Bank in Midland, there were no paper sacks.
I was surprised by the sudden crisis. My focus had been kitchen-table economic issues like jobs and inflation. I assumed any major credit troubles would have been flagged by the regulators or rating agencies. After all, I had strengthened financial regulation by signing the Sarbanes-Oxley Act in response to the Enron accounting fraud and other corporate scandals. Nevertheless, Bear Stearns’s poor investment decisions left it on the brink of collapse. In this case, the problem was not a lack of regulation by government; it was a lack of judgment by Bear executives.
My first instinct was not to save Bear. In a free market economy, firms that fail should go out of business. If the government stepped in, we would create a problem known as moral hazard: Other firms would assume they would be bailed out, too, which would embolden them to take more risks.
Hank shared my strong inclination against government intervention. But he explained that a collapse of Bear Stearns would have widespread repercussions for a world financial system that had been under great stress since the housing crisis began in 2007. Bear had financial relationships with hundreds of other banks, investors, and governments. If the firm suddenly failed, confidence in other financial institutions would diminish. Bear could be the first domino in a series of failing firms. While I was concerned about creating moral hazard, I worried more about a financial collapse.
“Is there a buyer for Bear?” I asked Hank.
Early the next morning, we received our answer. Executives at JPMorgan Chase were interested in acquiring Bear Stearns, but were concerned about inheriting Bear’s portfolio of risky mortgage-backed securities. With Ben’s approval, Hank and Tim Geithner, the president of the New York Fed, devised a plan to address JPMorgan’s concerns. The Fed would lend $30 billion against Bear’s undesirable mortgage holdings, which cleared the way for JPMorgan to purchase Bear Stearns for two dollars per share.****
Many in Washington denounced the move as a bailout. It probably didn’t feel that way to the Bear employees who lost their jobs or the shareholders who saw their stock drop 97 percent in less than two weeks. Our objective was not to reward the bad decisions of Bear Stearns. It was to safeguard the American people from a severe economic hit. For five months, it looked like we had.
“Do they know it’s coming, Hank?”
“Mr. President,” he replied, “we’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.”
It was the first week of September 2008, and Hank Paulson had just laid out a plan to place Fannie Mae and Freddie Mac, the two giant government-sponsored enterprises, into government conservatorship.
Of all the emergency actions the government had to take in 2008, none was more frustrating than the rescue of Fannie and Freddie. The problems at the two GSEs had been visible for years. Fannie and Freddie had expanded beyond their mission of promoting homeownership. They had behaved like a hedge fund that raised huge amounts of money and took significant risks. In my first budget, I warned that Fannie and Freddie had grown so big that they presented “a potential problem” that could “cause strong repercussions in financial markets.”
In 2003, I proposed a bill that would strengthen the GSEs’ regulation. But it was blocked by their well- connected friends in Washington. Many Fannie and Freddie executives were former government officials. They had close ties in Congress, especially to influential Democrats like Congressman Barney Frank of Massachusetts and Senator Chris Dodd of Connecticut. “Fannie Mae and Freddie Mac are not facing any kind of financial crisis,” Barney Frank said at the time.
That claim seemed more implausible as the years passed. In my 2005 budget, I issued a more dire warning.
