The Ugly Political Question, In 2008 And 1988

Here's reader email from Talking Points Memo:

I am appalled, though not surprised, at the complete silence by the candidates on the last few days' events on Wall Street and the world's stock, bond and currency markets. This has far more effect on all of our futures than racist comments by the oxygen deprived brains of some old political or spiritual leaders. I know why Clinton and McCain are not talking about it: too many of their biggest supporters had too much to do with what happened...What about Obama?... Maybe if the media first tried to understand the problems, then asked the proper questions until answers were forthcoming or it was clear the candidates are afraid to ask them, political coverage would be more than the extreme sports coverage it has turned into.

I strongly suspect we're seeing a replay of what happened with the S&L crisis in the eighties. The business details aren't exactly the same, but the political dynamics are.

At first the S&Ls were a fairly small problem. But fixing it when it was small would have required the financial industry to take a big hit. So Wall Street wanted to keep the game going until the problem was gigantic, and could only be dealt with by a federal government bailout. Meanwhile, both Republicans and Democrats were at fault, so they collaborated to prevent it becoming an issue during the 1988 election. Working together, they were able to cost the US taxpayers hundreds of billions of dollars.

Everything's the same today, except this may be an even more impressive, multi-trillion dollar success.

Here's an excerpt from William Greider's 1992 book Who Will Tell the People describing the process with S&Ls. It's long, but well worth reading:

The ugly political question that explains the politicians' stalling and obfuscation was always this: Would the taxpayers be compelled to put up the money to resolve this financial breakdown?...[I]f the taxpayers weren't going to pay for it, then the industry itself would have to. The modest $10 billion bailout enacted in 1987 employed federally guaranteed borrowing to raise the money but the funds were in theory going to be repaid by the S&L associations themselves... Thus, if Congress had provided prompt, adequate financing to solve the crisis, that would have meant raising the industry's premiums sharply... The saving and loan industry proposed a political alternative: Paper over the problem for now and let the next president deal with it... Kenneth McLean, staff director of the Senate Banking Committee...explained the subtext driving the congressional decision: "You were talking about taking away industry money and they said, look, we're paying for this mess...So the message was: Let's let the problem build up and dump it on the taxpayers." Congress, in effect, acquiesced to that logic and so did the Reagan administration. Sure enough, it was dumped on the taxpayers. A delicate political problem remained for both Democrats and Republicans. Having temporarily papered over the crisis, now they would have to get through the 1988 presidential election without the people finding out. This proved to be relatively easy since the only remaining power center that might have turned this into an embarrassing campaign issue was the news media. Politicians in both parties counted on political reporters not to catch on and they were not disappointed... The financial industry naturally shared the politicians' interest in discretion, but the bailout plans were not closely guarded secrets. An inquiring reporter could obtain copies with any special effort at digging. Robert Dugger, lobbyist and chief economist of the ABA, explained the politics: "Everyone knew the game was: Democrats don't bring this up. Republicans don't bring this up. Because a firefight on this issue will have more bodies on both sides than anyone wants to lose. The financial community knew that and we all knew where the play was: Wage the presidential campaign on all issues, but don't use the thrift crisis. We all know it has to be dealt with. We'll do it right after the election"... At the White House, the immediate goal was to get Ronald Reagan safely into retirement without having his final year in Washington marred by an embarrassing taxpayer bailout for a deregulated industry. When Dan Brumbaugh was briefly considered as a candidate for the job of chief S&L regulator, the word came back to him through political channels: "If this guy really wants this job, he's going to have to sit down with Howard Baker [Reagan's White House chief of staff] and assure Baker that we can hold things together until this president gets out of town."

—Jonathan Schwarz

Posted at March 17, 2008 04:51 PM

