by Obama Barack
Inequality also had a way of compounding itself. Even middle-class Americans found themselves increasingly priced out of neighborhoods with the best schools or cities with the best job prospects. They were unable to afford the extras—SAT prep courses, computer camps, invaluable but unpaid internships—that better-off parents routinely provided their kids. By 2007, the American economy was not only producing greater inequality than almost every other wealthy nation but also delivering less upward mobility.
I believed that these outcomes weren’t inevitable, but rather were the result of political choices dating back to Ronald Reagan. Under the banner of economic freedom—an “ownership society” was the phrase President Bush used—Americans had been fed a steady diet of tax cuts for the wealthy and seen collective bargaining laws go unenforced. There had been efforts to privatize or cut the social safety net, and federal budgets had consistently underinvested in everything from early childhood education to infrastructure. All this further accelerated inequality, leaving families ill-equipped to navigate even minor economic turbulence.
I was campaigning to push the country in the opposite direction. I didn’t think America could roll back automation or sever the global supply chain (though I did think we could negotiate stronger labor and environmental provisions in our trade agreements). But I was certain we could adapt our laws and institutions, just as we’d done in the past, to make sure that folks willing to work could get a fair shake. At every stop I made, in every city and small town, my message was the same. I promised to raise taxes on high-income Americans to pay for vital investments in education, research, and infrastructure. I promised to strengthen unions and raise the minimum wage as well as to deliver universal healthcare and make college more affordable.
I wanted people to understand that there was a precedent for bold government action. FDR had saved capitalism from itself, laying the foundation for a post–World War II boom. I often talked about how strong labor laws had helped build a thriving middle class and a thriving domestic market, and how—by driving out unsafe products and fraudulent schemes—consumer protection laws had actually helped legitimate businesses prosper and grow.
I explained how strong public schools and state universities and a GI Bill had unleashed the potential of generations of Americans and driven upward mobility. Programs like Social Security and Medicare had given those same Americans a measure of stability in their golden years, and government investments like those in the Tennessee Valley Authority and the interstate highway system had boosted productivity and provided the platform for countless entrepreneurs.
I was convinced we could adapt these strategies to current times. Beyond any specific policy, I wanted to restore in the minds of the American people the crucial role that government had always played in expanding opportunity, fostering competition and fair dealing, and making sure the marketplace worked for everybody.
What I hadn’t counted on was a major financial crisis.
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DESPITE MY FRIEND George’s early warning, it hadn’t been until the spring of 2007 that I started noticing troubling headlines in the financial press. The nation’s second-largest subprime lender, New Century Financial, declared bankruptcy after a surge in mortgage defaults in the subprime housing market. The largest lender, Countrywide, avoided the same fate only after the Federal Reserve stepped in and approved a shotgun marriage with Bank of America.
Alarmed, I had spoken to my economic team and delivered a speech at NASDAQ in September 2007, decrying the failure to regulate the subprime lending market and proposing stronger oversight. This may have put me ahead of the curve compared to other presidential candidates, but I was nonetheless well behind the pace at which events on Wall Street were beginning to spin out of control.
In the months that followed, financial markets saw a flight to safety, as lenders and investors moved their money into government-backed Treasury bonds, sharply restricted credit, and yanked capital out of any firm that might have significant risk when it came to mortgage-backed securities. Just about every major financial institution in the world was dangerously exposed, having either invested directly in such instruments (often taking on debt to finance their bets) or loaned money to firms that did. In October 2007, Merrill Lynch announced $7.9 billion in losses related to mortgages. Citigroup warned that its figure might be closer to $11 billion. In March 2008, the share price in the investment firm Bear Stearns dropped from $57 to $30 in a single day, forcing the Fed to engineer a fire-sale purchase by JPMorgan Chase. No one could say if or when Wall Street’s three remaining major investment banks—Goldman Sachs, Morgan Stanley, and especially Lehman Brothers, all of which were hemorrhaging capital at alarming rates—would face a similar reckoning.
For the public, it was tempting to see all this as a righteous comeuppance for greedy bankers and hedge fund managers; to want to stand by as firms failed and executives who’d drawn $20 million bonuses were forced to sell off their yachts, jets, and homes in the Hamptons. I’d encountered enough Wall Street executives personally to know that many (though not all) lived up to the stereotype: smug and entitled, conspicuous in their consumption, and indifferent to the impact their decisions might have on everyone else.
The trouble was that in the midst of a financial panic, in a modern capitalist economy, it was impossible to isolate good businesses from bad, or administer pain only to the reckless or unscrupulous. Like it or not, everybody and everything was connected.
By spring, the United States had entered a full-blown recession. The housing bubble and easy money had disguised a whole host of structural weaknesses in the American economy for a full decade. But with defaults now spiking, credit tightening, the stock market declining, and housing prices plummeting, businesses large and small decided to retrench. They laid off workers and canceled orders. They deferred investments in new plants and IT systems. And as people who had worked for those companies lost their jobs, or saw the equity in their homes or 401(k) plans dwindle, or fell behind on their credit card payments and were forced to spend down their savings, they, too, retrenched. They put off new car purchases, stopped eating out, and postponed vacations. And with declining sales, businesses cut payrolls and spending even more. It was a classic cycle of contracting demand, one that worsened with each successive month. March’s data showed that one in eleven mortgages was past due or in foreclosure and that auto sales had cratered. In May, unemployment rose a half point—the largest monthly increase in twenty years.
It had become President Bush’s problem to manage. At the urging of his economic advisors, he had secured bipartisan agreement from Congress on a $168 billion economic rescue package providing tax breaks and rebates meant to stimulate consumer spending and give the economy a jolt. But any effect it may have had was dampened by high gas prices that summer, and the crisis only grew worse. In July, news stations across the country broadcast images of desperate customers lined up to pull their money out of IndyMac, a California bank that promptly went belly-up. The much larger Wachovia survived only after Secretary Paulson was able to invoke a “systemic risk exception” to prevent its failure.
Congress meanwhile authorized $200 billion to prevent Fannie Mae and Freddie Mac—the two privately owned behemoths that together guaranteed nearly 90 percent of America’s mortgages—from going under. Both were placed in government conservatorship through the newly formed Federal Housing Finance Agency. Yet even with an intervention of that magnitude, it still felt as if the markets were teetering on the edge of collapse—as if the authorities were shoveling gravel into a crack in the earth that just kept on growing. And for the moment, at least, the government had run out of gravel.
Which was why Hank Paulson, the U.S. Treasury secretary, was calling me. I had first met Paulson when he was the CEO of Goldman Sachs. Tall, bald, and bespectacled, with an awkward but unpretentious manner, he’d spent most of our time talking about
his passion for environmental protection. But his voice, typically hoarse, now sounded thoroughly frayed, that of a man fighting both exhaustion and fear.
That morning, Monday, September 15, Lehman Brothers, a $639 billion company, had announced it was filing for bankruptcy. The fact that the Treasury Department had not intervened to prevent what would be the largest bankruptcy filing in history signaled that we were entering a new phase in the crisis.
“We can expect a very bad market reaction,” he said. “And the situation is likely to get worse before it gets better.”
He explained why both Treasury and the Fed had determined that Lehman was too weak to prop up and that no other financial institution was willing to take on its liabilities. President Bush had authorized Paulson to brief both me and John McCain because further emergency actions would need bipartisan political support. Paulson hoped that both campaigns would respect and respond appropriately to the severity of the situation.
You didn’t need a pollster to know that Paulson was right to be worried about the politics. We were seven weeks from a national election. As the public learned more about the enormity of the crisis, the idea of spending billions of taxpayer dollars to bail out reckless banks would surely rank in popularity somewhere between a bad case of shingles and Osama bin Laden. The following day, Paulson’s Treasury would prevent catastrophes at Goldman Sachs and Morgan Stanley by redefining both institutions in a way that allowed them to create commercial banks eligible for federal protection. Still, even blue-chip companies with sterling ratings were suddenly unable to borrow the money needed to finance day-to-day operations, and money market funds, previously considered as safe and liquid as cash, were now starting to buckle.
For Democrats, it would be easy enough to lay blame for the fiasco at the foot of the administration, but the truth was that plenty of congressional Democrats had applauded rising homeownership rates throughout the subprime boom. For Republicans who were up for reelection and already saddled with an unpopular president and a tanking economy, the prospect of voting for more Wall Street “bailouts” looked like an invitation to dig their own graves.
“If you need to take further steps,” I told Paulson, “I’m guessing your biggest problem will come from your side, not mine.” Already, many Republicans were complaining that the Bush administration’s interventions in the banking sector violated the core conservative principles of limited government. They accused the Federal Reserve of overstepping its mandate, and some had the gall to criticize government regulators for failing to catch the problems in the subprime market sooner—as if they themselves hadn’t spent the past eight years working to weaken every financial regulation they could find.
John McCain’s public comments up to that point had been muted, and I urged Paulson to keep in close contact with my competitor as the situation developed. As the Republican nominee, McCain didn’t have the luxury of distancing himself from Bush. His vow to continue most of Bush’s economic policies, in fact, had always been one of his great vulnerabilities. During the primaries, he’d confessed that he didn’t know much about economic policy. He’d more recently reinforced the impression that he was out of touch by admitting to a reporter that he wasn’t sure how many homes he owned. (The answer was eight.) Based on what Paulson was telling me, McCain’s political problems were about to get worse. I had no doubt his political advisors would urge him to improve his standing with voters by distancing himself from any financial rescue efforts the administration tried to make.
If McCain chose not to be supportive, I knew I’d be under fierce pressure from Democrats—and perhaps my own staff—to follow suit. And yet, as I wrapped up the conversation with Paulson, I knew that it didn’t matter what McCain did. With the stakes this high, I would do whatever was necessary, regardless of the politics, to help the administration stabilize the situation.
If I wanted to be president, I told myself, I needed to act like one.
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AS EXPECTED, John McCain had difficulty coming up with a coherent response to the rapidly unfolding events. On the day of the Lehman announcement, in an ill-timed attempt at reassuring the public, he appeared at a televised rally and declared that the “fundamentals of the economy are strong.” My campaign absolutely roasted him for it. (“Senator, what economy are you talking about?” I asked, speaking later in the day at a rally of my own.)
In the ensuing days, the news of Lehman’s bankruptcy sent financial markets into a full-blown panic. Stocks plunged. Merrill Lynch had already negotiated a desperation sale to Bank of America. Meanwhile, the Fed’s $200 billion loan program to banks had proven to be insufficient. Along with all the money to shore up Fannie and Freddie, another $85 billion was now being consumed by an urgent government takeover of AIG, the massive insurance company whose policies underwrote the subprime security market. AIG was the poster child for “too big to fail”—so intertwined with global financial networks that its collapse would cause a cascade of bank failures—and even after the government intervened, it continued to hemorrhage. Four days after Lehman’s collapse, President Bush and Secretary Paulson appeared on television alongside Ben Bernanke and Chris Cox, the respective chairs of the Federal Reserve and the Securities and Exchange Commission, and announced the need for Congress to pass a bill that would eventually be known as the Troubled Asset Relief Program, or TARP, establishing a new emergency fund of $700 billion. This was the price, they estimated, of staving off Armageddon.
Perhaps to compensate for his earlier blunder, McCain announced his opposition to the government bailout of AIG. A day later, he reversed himself. His position on TARP remained unclear, opposing bailouts in theory but maybe supporting this one in practice. With all the zigging and zagging, our campaign had no problem tying the crisis to a “Bush-McCain” economic agenda that prioritized the wealthy and powerful over the middle class, arguing that McCain was unprepared to steer the country through tough economic times.
Nevertheless, I did my best to stay true to the commitment I’d made to Paulson, instructing my team to refrain from making public comments that might jeopardize the Bush administration’s chances at getting Congress to approve a rescue package. Along with our in-house economic advisors, Austan Goolsbee and Jason Furman, I had begun consulting with an ad hoc advisory group that included former Federal Reserve chairman Paul Volcker, former Clinton Treasury secretary Larry Summers, and legendary investor Warren Buffett. All had lived through major financial crises before, and each confirmed that this one was of a different order of magnitude. Without swift action, they told me, we faced the very real possibility of economic collapse: millions more Americans losing their homes and their life savings, along with Depression-era levels of unemployment.
Their briefings proved invaluable in helping me understand the nuts and bolts of the crisis and evaluate the various responses being proposed. They also scared the heck out of me. By the time I traveled to Tampa, where I would be preparing for my first debate with McCain, I felt confident that on the substance of the economy, at least, I knew what I was talking about—and I increasingly dreaded what a prolonged crisis might mean for families all across America.
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EVEN WITHOUT THE distraction of a looming crisis, I probably wouldn’t have looked forward to being holed up in a hotel for three days of debate prep. But given my inconsistency during the primary debates, I knew I needed the work. Fortunately, our team had recruited a pair of lawyers and political veterans—Ron Klain and Tom Donilon, who had served in similar roles prepping candidates like Al Gore, Bill Clinton, and John Kerry. The moment I arrived, they gave me a detailed breakdown of the debate format and an outline of every conceivable question that might be asked. Along with Axe, Plouffe, communications advisor Anita Dunn, and the rest of the team, they drilled me for hours on the precise answers they wanted to hear, down to the last word or turn of phrase. In
the old Biltmore Hotel where we had set up shop, Ron and Tom had insisted on building an exact replica of the debate stage, and that first night they subjected me to a full ninety-minute mock debate, picking apart every aspect of my performance, from pace to posture to tone. It was exhausting but undeniably useful, and by the time my head hit the pillow, I was certain I would be dreaming in talking points.
Despite their best efforts, though, news from outside the Klain-Donilon bubble kept diverting my attention. In between sessions, I got updates on market developments and on the prospects for the administration’s TARP legislation. To call it “legislation” was a stretch: The bill Hank Paulson had submitted to Congress consisted of three pages of boilerplate language authorizing the Treasury to use the $700 billion emergency fund to buy troubled assets or more generally take steps it deemed necessary to contain the crisis. With the press and the public howling at the price tag and representatives from both sides of the aisle balking at the lack of detail, Pete Rouse told me, the administration wasn’t even close to having the votes it needed for passage.
Harry Reid and House Speaker Nancy Pelosi affirmed this when I spoke to them by phone. Both were hard-nosed politicians, not averse to bashing Republicans in order to solidify their majorities when the opportunity arose. But as I would see repeatedly over the next few years, both Harry and Nancy were willing (sometimes after a whole lot of grousing) to set politics aside when an issue of vital importance was at stake. On TARP, they were looking to me for direction. I shared my honest assessment: With some conditions attached to ensure it wasn’t just a Wall Street giveaway, Democrats needed to help get it passed. And to their credit, the two leaders said they’d manage to drag in their respective caucuses and provide votes for passage—if Bush and GOP leaders delivered sufficient Republican votes as well.