President George W. Bush's memoir Decision Points is out in bookstores today, and while most of the early reviews have focused on elements such as his decision to quit drinking alcohol and his handling of the September 11 attacks and Hurricane Katrina, the chapter I was most interested in was the one on the financial crisis.
It begins by recounting a Roosevelt Room meeting on September 18, 2008. "Mr. President, we are witnessing a financial panic," Federal Reserve Chairman Ben Bernanke told President Bush. The book recounts that "Over the previous two weeks, the government had seized Fannie Mae and Freddie Mac, two giant housing entities." It goes on, "With so much turbulence in financial institutions, credit markets had seized up."
Mr. Bush doesn't pause to consider that the "turbulence," rather that being something natural like the weather, was something that had been worsened by the government's action.
Mr. Bush explains his support for the aid to banks that became known as TARP by writing, "In a normal environment, the free market would render its judgment and they could fail. I would have been happy to let them do so. But this was not a normal environment. The market had ceased to function."
After that mid-September meeting, Mr. Bush recalls, he told a few close aides: "If we're really looking at another Great Depression, you can be damn sure I'm going to be Roosevelt, not Hoover."
Before his 2000 presidential campaign, President Bush read Amity Shlaes's book on taxes, The Greedy Hand. To judge by this, though, Mr. Bush hasn't read Amity Shlaes's book on the Great Depresssion, The Forgotten Man. If he had, he wouldn't be buying into the myth of a Hoover who failed to act decisively to counteract the Depression, or the myth of a Roosevelt who saved the country from Depression by aggressive government intervention. If Mr. Bush was a Roosevelt, it was only in the Forgotten Man sense of someone who made things worse by creating uncertainty through arbitrary and heavy handed government action that kept private actors on the sidelines. Mr. Bush is right that he was a Roosevelt, but not in the sense that he wanted to be.
To get a sense of just how arbitrary and heavy-handed the government action was, listen to Mr. Bush's description of his interaction with the Treasury Secretary, Henry Paulson, over the government seizure of Fannie Mae from its private shareholders, who less than a month earlier had been assured by Mr. Paulson that he supported preserving Fannie Mae and Freddie Mac "in their current form as shareholder-owned companies":
"Do they know it's coming, Hank?"
"Mr. President," he replied, "we're going to move quickly and take them by surprise. The first sound they'll hear is their heads hitting the floor."
No wonder that a financial panic ensued.
Mr. Bush recounts that after legislation to "reform" Fannie and Freddie passed in July 2008, "the new regulatory agency, led by friend and businessman Jim Lockhart, took a fresh look at Fannie's and Freddie's books. With help from the Treasury Department, the examiners concluded the GSEs had nowhere near enough capital."
But Treasury Secretary Henry Paulson's book, On the Brink, tells a different story: that new regulatory agency, the Federal Housing Finance Agency, "had recently given the two companies clean bills of health" and "FHFA's most recent semiannual regulatory exams had not cited capital shortfalls."
Mr. Bush acknowledges that TARP and the other steps the government took amid the crisis were "a breathtaking intervention in the free market," "the most drastic intervention in the free market since the presidency of Franklin Roosevelt." (I'd put Nixon's wage and price controls up there, but that's a topic for another day.) He writes that he told his chief of staff, "My friends back home in Midland are going to ask what happened to the free market guy they knew."
Mr. Bush explains his mid-September actions by saying that "The market had ceased to function." He uses the same language to justify his mid-November bailout of the auto industry. "With the markets not yet functioning, I had to safeguard American workers and families from a widespread collapse."
The chapter concludes with a plea: "Above all, our country must maintain our faith in free markets, free enterprise, and free trade. Free markets have made America a land of opportunity and, over time, helped raise the standard of living for successive generations. Abroad, free markets have transformed struggling nations into economic powers and lifted hundreds of millions of people out of poverty."
I think Mr. Bush would have an easier time convincing readers to maintain faith in free markets if he were not also insisting that those markets somehow took a three month hiatus from functioning and were only rescued by virtue of his own Franklin Roosevelt style interventions. There were some people whose faith in markets led them to invest in what they thought were undervalued shares of Fannie Mae. The first sound they heard was that of their heads hitting the floor, and taking a lot of the rest of the economy along with them.