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Why Bush's quiet role in the financial crisis deserves attention now

The Wall Street Journal. logo The Wall Street Journal. 9/12/2018 Greg Ip

© Brendan Smialowski/Getty Images   The day after Lehman Brothers failed, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke went to President George W. Bush with bad news. Insurer American International Group Inc. needed $85 billion or it, too, would collapse.

Though unhappy and frustrated, Mr. Bush approved the loan, saying, “If we suffer political damage, so be it,” Mr. Paulson later wrote.

Scholars of the crisis rightly focus on the decisions that the three crisis managers—Mr. Paulson, Mr. Bernanke and New York Fed President Tim Geithner—made to rescue the financial system. Though unpopular at the time and still second-guessed, their actions were vital in avoiding a second Great Depression. Yet most would have been impossible without the president’s support, which Mr. Bush gave unreservedly from start to finish.

Mr. Bush’s unsung role merits greater appreciation today. Ten years after the crisis, the financial system is stronger, but the political system is far more fragile. Polarization, populism and protectionism mean the next crisis will be met with far less political will than the last.

You don’t have to look far to see the potential consequences. Fractured politics are largely why the eurozone took so much longer to respond to and recover from its crisis than the U.S. The bloc lacks a unified fiscal authority, so decisions on how to commit public funds had to pass muster with a skeptical German public. For that reason the eurozone insisted on austerity and Draconian bailout terms for crisis-stricken countries that worsened the downturn. The European Central Bank couldn’t take the sorts of radical steps the Fed did for at least two years because of German political resistance.

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The Depression tells a similar story. President Herbert Hoover’s efforts to stem growing unemployment and bank failures fell short because he wanted private-sector solutions when government money was needed. One promising effort to shore up shaky banks with public money fizzled when an indignant Congress demanded recipients’ names be published, a stigma that drove banks away. Hoover signed tariff and tax increases into law out of misguided political orthodoxy.

After Franklin D. Roosevelt defeated Hoover in 1932, speculation mounted that he would suspend the dollar’s convertibility to gold. Shortly after taking office he did, which was critical in ending the Depression. But the four months in which he didn’t answer speculation on his plans for the dollar accelerated the outflow of gold and the resulting tidal wave of bank failures.

Mr. Bush’s legacy is overshadowed by many controversies of his own making, such as the U.S. invasion of Iraq, but his responsibility for causing the crisis that would cost his party the White House was at most minor and shared with predecessors.

Nonetheless, he was prepared to abandon political orthodoxy to fix it. In his memoir, Mr. Bush recalls lobbying a Republican congressman to approve the Troubled Asset Relief Program, which would eventually inject billions of dollars into banks. The legislator protested that he couldn’t be “part of the destruction of the free market.” Mr. Bush retorted: “Do you think I like the idea of doing this? Believe me, I’d be fine if these companies fail. But the whole economy is on the line.”

Related video: Warren Buffett explains the 2008 financial crisis


Unlike Roosevelt, Barack Obama didn’t allow a dangerous vacuum to form as the White House changed hands. He stayed in touch with Mr. Paulson during the 2008 election campaign, mustered Democratic votes for TARP, and appointed Mr. Geithner his Treasury Secretary. (John McCain, the Republican candidate, vacillated more on bailouts, though he ultimately voted for TARP.) Still, for all the credit Mr. Obama is given for turning the economy around, the toughest decisions were made by Mr. Bush.

They will be far harder to make in the next crisis. Ray Dalio, founder of hedge fund Bridgewater Associates, has just published a meticulous study of debt crises as a free e-book. In an interview, he says a significant takeaway is that resolving a crisis depends in great part on whether the crisis fighters “have the knowledge and authority to make decisions or if they are encumbered by the political environment.”

Chinese leaders, he believes, have both the necessary know-how and authority to deal with an eventual crisis. For the U.S., he’s more pessimistic, partly because its leaders have fewer tools: interest rates can’t be lowered as much, and Congress curbed much of the discretion the Fed and Treasury used to stem the panic. Politically, Mr. Dalio believes inequality and populism will only worsen in the next downturn, depriving crisis managers of the political freedom they need to make unpopular decisions.

President Donald Trump is adept at feeling the pulse of his base at any given moment and shifting his position accordingly, yet crisis management often requires doing the opposite of what the public demands. His belief that international relations are zero-sum would make cross-border cooperation harder.  Meanwhile, what little unity the eurozone was able to muster in recent years will be harder with populists now governing Italy and leading the opposition in Germany.

Much of Mr. Bush’s legacy has been dismissed by Democrats and renounced by Republicans. Yet when the next crisis rolls around, both may find they miss him.


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