Sheila Bair, former chair of the FDIC

Bank bailouts propped up the financial system. But we should never repeat them.

Op-Ed By Sheila Bair, The Washington Post, May 23, 2019

A decade after the massive government bailouts for Wall Street, some of the financial intelligentsia in New York and Washington no longer seem to view them as a bad thing. Rather than taxpayer hand-outs to reckless financial institutions, a new narrative holds that the extreme moves of 2008 and 2009 were heroic measures that the government should be ready to redeploy if the financial sector implodes again. Bankers and Wall Street titans, for whom this argument carries obvious benefits, aren’t the only ones making it. Even some leading economists are expressing sympathy for this view. But the main proponents of this idea are former treasury secretaries Hank Paulson and Timothy Geithner, and former Federal Reserve Board chair Ben Bernanke, key architects of the government’s response to the financial meltdown. They recently co-authored a book to advance the point.

As chair of the Federal Deposit Insurance Corporation during those tumultuous years, I worked closely with these three gentlemen on stabilization measures. During the financial panic, I went along with them because I understood the bailouts to be one-offs, unprecedented measures to address an unprecedented crisis. I thought that once we got through those dark days, we would commit to fundamental reforms of the financial system to make sure it wouldn’t run us into a ditch again. But now Geithner, Paulson and Bernanke want to standardize these extraordinary measures and even repeal the modest limits Congress wisely placed on them in 2010.

Most of the major failures that occurred during the crisis were of non-bank brokerage or insurance firms such as Lehman Brothers, Bear Stearns and AIG. For these entities, we didn’t have a playbook, which is why there was so much ad hoc decision-making that made us vulnerable to accusations of caprice and bad judgment. But our ability to exercise broad discretion with no real-time oversight or transparency left us open to criticism.Our successors now have the playbook that we so badly needed in 2008 and 2009. And if they have to make the same kind of hard choices we did, they will at least have rules that justify their actions.

The public also needs a more thoughtful reassessment of how we could do more to let mismanaged financial institutions face the consequences of their executives’ bad decisions. Orderly liquidation of these institutions, as Congress has legislated, and imposition of losses on their investors would do far more to tame the financial sector than a regulatory regime that is proving itself, once again, to be far too captive of a Wall Street mind-set. Regulators are moving — as they were in 2006, just before the crisis — to ease requirements for how much money big banks must have on hand, as well as restrictions on loose lending and risky investments, when the banks should be tightening standards and building reserves for the next downturn.

Bailout advocates defend the massive bailouts as necessary to avert another Great Depression. Maybe. It’s hard to prove a negative. But I doubt the general public will ever accept the story that the bailouts were meant to help Main Street. After all, most of the big banks barely missed a few quarters of profitability and were paying their executives big bonuses again by the end of 2009. No one went to jail.

It’s naive to think that our democracy could survive another financial crisis and another round of big bank bailouts. It’s wrongheaded to make serial bailouts the new normal. If the financial sector is really that unstable, we should just break up the big banks now — my preference — or nationalize them.

The last catastrophe saw 9 million jobs lost, 8 million homes gone. We cannot survive that again without even more major political upheaval. So if there is a next time, let’s allow a few of those mismanaged big banks to go down in flames and focus instead on putting out the fires on Main Street — by helping borrowers and supporting the better-managed banks, the ones that can keep credit flowing to the real economy. The survival of a reckless and unstable financial sector is not the business of our government. The survival of democracy is.

Sheila Bair, chair of the Federal Deposit Insurance Corporation from 2006 to 2011, is a founding board member of the Volcker Alliance, a nonprofit established to rebuild trust in government.