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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