The 2008 Bailout v. The Great Depression Bailouts

Key­ing off an opin­ion piece by Paul Krug­man, Eric Rauch­way, an Amer­i­can his­to­ri­an (and also an old grad school col­league of mine), offers an intrigu­ing analy­sis of the Bush/Paulson bailout and how it com­pares to the Hoover and FDR bailouts from the Depres­sion era. The dif­fer­ence between 1932/33 and 2008? In 2008 (get text of leaked plan here), Con­gress will have no over­sight and the exec­u­tive branch will be “behold­en to nobody and sub­ject to no review.” (Sound vague­ly famil­iar?) There will also be no stat­ed restric­tions on how much a giv­en cor­po­ra­tion can be assist­ed, and no require­ment that cor­po­ra­tions give the gov­ern­ment any­thing back in turn. (There’s not even a require­ment that the gov­ern­ment buy the bad debt for fair mar­ket val­ue.) Back in the 30s, how­ev­er,  “All loans had to be secured, couldn’t be made on for­eign secu­ri­ties or accep­tances, no more than 5% of the mon­ey could go to any one com­pa­ny, couldn’t exceed three years’ term, couldn’t pay fees or com­mis­sion to appli­cants for loans, and so forth. Rail­roads accept­ing such loans had to do so under terms accept­able to the reg­u­la­to­ry Inter­state Com­merce Com­mis­sion.”

The idea of hand­ing the Bush admin­is­tra­tion anoth­er blank check is hard­ly a hap­py one. We’ve been down that road before and things did­n’t exact­ly go smooth­ly.  But then again I’m not sure that the 1930s offers won­der­ful mod­els for cat­a­stro­phe man­age­ment (not that Rauch­way is say­ing that). Let’s hope that our lead­ers take a lit­tle time to think things through.

And, by the way, New Rule: No one on Wall Street should be allowed to make more than six fig­ures until they’ve cleaned up their mess and reim­bursed the tax­pay­ers. Yes, wish­ful think­ing I know, since appar­ent­ly Lehman, even hav­ing gone bank­rupt, has found a way to a share a $2.5 bil­lion bonus pool.

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  • Hanoch says:

    Hand­ing any­one in gov­ern­ment a “blank check” is a bad idea. How­ev­er, if I were forced to take that gam­ble, I would put my mon­ey with repub­li­cans. After all, this mess came about because of the fail­ure to rein in the GSEs, and that can be laid square­ly at the feet of the democ­rats. As Charles Calomiris and Peter Wal­li­son recent­ly not­ed in the Wall Street Jour­nal (, if the democ­rats had let repub­li­can-spon­sored leg­is­la­tion in 2005 to come up for “a vote, the huge growth in the sub­prime and Alt‑A loan port­fo­lios of Fan­nie and Fred­die could not have occurred, and the scale of the finan­cial melt­down would have been sub­stan­tial­ly less.” How­ev­er, the democ­rats were big sup­port­ers of this reck­less lend­ing because it sup­port­ed their “afford­able hous­ing mis­sion”.

  • Dan Colman says:

    Hanoch, That is a hard argu­ment to make when you con­sid­er the very sim­ple fact that the Repub­li­cans owned every branch of gov­ern­ment dur­ing the mak­ing of the real estate bub­ble. But it’s a nice try. And thanks for your con­tri­bu­tion.


  • Hanoch says:

    Not a very per­sua­sive point, Dan. Take a look at the judi­cial nom­i­na­tion process if you think it is easy for a slim major­i­ty in Con­gress to enforce its will over vig­or­ous oppo­si­tion.

    The bot­tom line is that, long before the cur­rent mess, the most vocal crit­i­cism of the GSEs came from the right. I am no cheer­leader for the repub­li­cans when it comes to fis­cal respon­si­bil­i­ty. Unfor­tu­nate­ly, how­ev­er, when you look at the alter­na­tive, there real­ly is no choice.

  • Matt Willhelm says:

    So the 2005 bill would have pre­vent­ed Fan­nie and Fred­die from keep­ing a port­fo­lio, and in turn, a port­fo­lio full of bad loans. This is admit­ted­ly a good idea. But would­n’t that just lead to oth­er banks buy­ing up the bad loans that would have end­ed up in the Fannie/Freddy port­fo­lio? Would­n’t this prob­lem still exist? Fan­ny and Fred­die are essen­tial­ly pri­vate com­pa­nies now right? So how can you exclude them from hold­ing por­fo­lios? Maybe that was the Democ­ra­t’s think­ing?
    Hanoch and Peter seem anx­ious to pin this on the democ­rats, but I agree with Dan, nice try. What about Phil Grahm, debt rat­ing agen­cies, lack of auditing/regulating loan orig­i­na­tors. This don­key has many tails.
    Not to men­tion, weren’t the Repub­li­cans the major­i­ty in 2005. How did the Democ­rats take this off the major­i­ty’s table? Oba­ma’s been on For­eign Rela­tions, Home­land Secu­ri­ty, Health and Edu­ca­tion com­mit­tees, not finance com­mit­tees, maybe it was­n’t his place to be mak­ing finance laws?

  • Hanoch says:

    Matt, I am not “anx­ious to pin” the blame on the democ­rats. On this issue, how­ev­er, it seems that, as between the democ­rats and repub­li­cans, the repub­li­cans gen­er­al­ly had it right. It is thus odd to suggest–as the orig­i­nal post did–that the repub­li­cans are the less trust­wor­thy par­ty for imple­ment­ing a bailout.

    If you don’t care for the WSJ arti­cle, here is one from IBD which also describes the gen­e­sis of this mess:

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