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The crowd reaction at last week’s presidential debate said a lot about the direction of today’s Republican Party: Cheers for Sen. Ted Cruz of Texas; jeers for Gov. John Kasich of Ohio.
The two Republican candidates veered sharply apart as Cruz flatly asserted that as president he would not “bail” out a major bank on the verge of failure while Kasich insisted “when there is a “financial crisis or a crisis with Ebola, you’ve got to go there and try to fix it.”
The testy exchange highlights the growing divide between conservative populists who rail against the 2008 rescue of the nation’s largest financial institutions and more establishment Republicans who believe the $700 billion package approved by Congress prevented the economy from tumbling into a dizzying collapse not seen since the 1930s.
“We needed to stabilize Wall Street because we were afraid that the effects of the collapsing financial system on the economy would be catastrophic,” former Federal Reserve Board Chairman Ben Bernanke, one of the architects of the 2008 financial rescue package, said this month in a C-Span interview.
Yet seven years after the Wall Street financial crisis caused stocks and home prices to plunge, threatened the very survival of General Motors and Chrysler, and led to the loss of four million jobs, a growing number of conservative Republicans are as hostile as ever to the thought that taxpayers had to hand over their money to keep the financial system working.
The federal intervention — which included saving the Detroit automakers and more federal spending — helped fuel the abrupt rise of the conservative tea party as a force in Republican politics, and led to continuing debates over the appropriateness of using the power of the federal government to help large financial institutions and major companies.
Whether the bailout worked or not is still hotly contested within the GOP.
“There is no way to empirically” prove the economy would have collapsed without drastic federal intervention, said Norbert Michel, a research fellow in financial market regulations at conservative Heritage Foundation in Washington, D.C. “What we can say for sure is the recovery took very long. It took longer and was slower than recoveries from the average recession.”
Dramatic interventions
The financial bailout of 2008, championed by Republican President George W. Bush, was just one of a series of dramatic federal interventions during the next two years aimed at stabilizing the economy.
They included the rescue of General Motors and Chrysler, the $787 billion economic stimulus package signed in 2009 by President Barack Obama, and the new financial regulation law of 2010 known as Dodd-Frank — a target for many Republicans on the stage at last week’s debate.
With the political argument as a backdrop, many economists maintain the bailouts were necessary to avoid a more prolonged collapse.
Former Federal Reserve Board member Alan Blinder and Mark Zandi, chief economist at the economic forecasting firm Moody’s Analytics, concluded in a report released last month, “The bailout of the financial system appears to have been highly effective and efficient.
“Many have criticized the policy response for being unfair,” they wrote. “But there are always winners and losers when policies change, and in this case the winners far outnumbered the losers. Would other Americans have been better off if the government had refused to save the (greedy and irresponsible) banks and the (incompetent) auto companies? We are pretty sure the answer is no.”
‘Never is a long time’
Kasich seemed to brush aside the boos he received during the debate. During a campaign appearance Thursday in New Hampshire, the Ohio governor said that without the financial rescue plan approved by Congress in 2008 “there probably would’ve been a lot of depositors that really would have been hurt. This came quickly.”
“Look, we hope it will never happen again,” Kasich said. “Some people say we never will, but never is a long time.”
Peter Wallison, author of the book, “Hidden In Plain Sight,” and a sharp critic of the Bush administration and Bernanke’s handling of the financial crisis, said, “Cruz is the one who is basically wrong” to oppose bailouts under any circumstances because when a large bank fails “it ripples through the economy in very adverse ways.”
While Kasich was misleading when he said people would lose their life’s savings — “we have deposit insurance,” said Wallison, a scholar at the Washington-based American Enterprise Institute — he “was in a sense right in that there would be chaos in our economy.”
Sluggish recovery
Data shows that without question the economy has grown since the rescue of Wall Street and the automakers as well as passage of the economic stimulus.
Not only did the federal government recoup nearly all of the $700 billion from the 2008 rescue package, but the stock market has rebounded, the nation’s gross domestic product has climbed from $14.8 trillion in 2008 to nearly $16 trillion last year and the unemployment rate has plunged from 10 percent in October of 2010 to 5 percent last month.
Blinder and Zandi’s study shows far less favorable economic indicators if there was no bailout.
“We estimate that, due to the fiscal and financial responses of policymakers (the latter of which includes the Federal Reserve), real GDP was 16.3 percent higher in 2011 than it would have been. Unemployment was almost seven percentage points lower that year than it would have been, with about 10 million more jobs,” they wrote.
But Wallison says one of the outgrowths of the bailout — the Dodd-Frank law — continues to discourage major business spending even if you accept that the financial rescue package gave the market more confidence.
The law, enacted to prevent a recurrence of the events that caused the 2008 financial crisis, created new regulatory agencies such as the Consumer Financial Protection Bureau (headed by former Ohio Attorney General Richard Cordray) that Republicans like Cruz have labeled a “runaway” agency with little accountability.
Wallison puts much of the blame for the slow recovery on Dodd-Frank.
“This is not the way the U.S. economy usually recovers and I believe the reason is the steps the government took, including Dodd-Frank, which put a wet blanket over the economy,” he said.
Jessica Wehrman of the Washington Bureau, reporting from New Hampshire, contributed to this report.
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