The Daily - 10 Years After the Financial Crisis

Episode Date: September 21, 2018

A decade ago, U.S. policymakers hatched a plan to rescue a financial system in free fall. Their solution solved that crisis — but deepened another. Guest: Andrew Ross Sorkin, a financial columnist for The New York Times. For more information on today’s episode, visit nytimes.com/thedaily.

From The New York Times, I'm Michael Barbaro. This is The Daily. Today. Ten years ago this week, U.S. policymakers hatched a plan to rescue a financial system in freefall. Their solution solved that crisis, but only deepened another.

And the latest on the Kavanaugh confirmation. It's Friday, September 21st. It's Friday, September 21st. So, back in 2008, I was covering Wall Street. And in the fall of 2008, it was the second week of September. It's been an unnerving week for U.S. financial markets. First, the massive federal bailout of mortgage lending giants Fannie Mae and Freddie Mac. And now, the potential collapse of Lehman Brothers, once the fourth largest investment firm in the U.S.

We started watching the stock of Lehman Brothers just fall like a stone. This week alone, Lehman Brothers stock plummeted almost 80 percent. And there was this anxiety and panic. Analysts say the bank's future is in doubt after it reported a loss of nearly $4 billion in the last quarter. is in doubt after it reported a loss of nearly $4 billion in the last quarter. And I'll never forget that Friday, in large part because Friday morning, my grandfather died. And I actually went to the office that morning,

but went home and then got a call that all of the CEOs of the big banks on Wall Street were being summoned to the Federal Reserve in New York City. Andrew Ross Sorkin covers finance for The Times. All weekend, top executives of rival banks, along with Federal Reserve and Treasury Department officials, met under tight security to discuss plans to buy Lehman whole or in parts. To try to come up with a scheme to save Lehman Brothers. These extraordinary negotiations follow the government's historic takeover of Freddie Mac and Fannie Mae last weekend and the March bailout of investment house Bear Stearns.

Many on Wall Street believe there's still more to come. And I had a conversation with my dad about what I should do because normally you just stay at home and be with your family. And we both talked about how my grandfather would have said, you got to cover this thing. And so I was in the office all weekend. And I think most of the weekend we thought Lehman Brothers was going to be saved. The U.S. Treasury Department and the Federal Reserve are said to be working closely with Lehman Brothers to find a buyer. It's like cutting out a tumor.

Once you cut the tumor out, the body is healthy and goes on. And that's what we're going through right now. But by middle of the day Sunday, I started getting calls from some of the CEOs and executives that were down at the New York Fed. And you could tell things were bad. And by late in the afternoon, I remember getting one call in particular. Lehman Brothers is going bankrupt. And they said this thing's going down. Lehman, which has 25,000 employees, will be liquidated.

People yesterday literally packing up their life's work and carrying it out in a box. It's over. This is absolutely stunning. Wall Street has seen very, very few days like this. This is a whole other level of confusion. This is a how bad does it get? And huge, huge news beyond Lehman Brothers, which is not the biggest shock this morning, by the way. That unto itself was scary, but it wasn't really until later that evening. We learned for the first time that Merrill Lynch was being sold to Bank of America.

And then I remember getting a call at about 10.30 p.m. from another executive who had been trying to get a hold of the whole weekend. Insurance giant AIG is the next name on the list of troubled companies. He said AIG is about to go down. It was an historic day with Wall Street shaken to its very foundation today. And even the health of the most trusted firms are now being called into question. I remember going home at two o'clock in the morning. We had just finished the front page article for the New York Times. And I had no idea what was going to happen the next day.

And I don't think anybody did. And I remember really feeling like the world was on fire. Traders here working the phone say a lot of their customers are freaked out, waiting to see how low the Dow will go. They're focused on the Dow. At about noon on Monday, all hell broke loose. Let's talk about the speed with which we are watching this market deteriorate. We're down by between 3% and 4.5% generally across these markets. The stock market is now down 21%.

We're now down 43%. I have never live looked at the Dow Jones Industrial Board and seen a 600-point loss. Who knows where this is going to end up? I mean, this is volatility we haven't seen, of course, since way before you and I were born, even before our grandparents, you know, 1929. I had never covered anything like this before. Andrew, what had actually brought us to this point? What had gone wrong before this weekend? Debt.

It was really a crisis about mortgages, home mortgages. For years, starting really in 2002 and 2003, the banks offered loans to people who, frankly, never could have paid back the money. And in an effort to diversify that risk of all of those loans, they chopped those mortgages up and repackaged them and sold them to others. But, in fact, they had just spread the risk out even more. So by the fall of 2008, you have this confluence of things happening. You have people who can't pay their debts, so now they're underwater. The banks now are underwater because they don't have people paying them. And all of a sudden, the banks are holding the bag. So at this point, and I remember this moment really well, I was covering Mike Bloomberg

as mayor, suddenly grappling with a financial crisis that was going to impact New York City. The question consuming everyone in New York City, across the United States, really around the world, was how do we fix this soon enough to ensure we don't have another Great Depression? Exactly. And there are a hundred ideas that are being thrown against the wall.

Could they literally go mortgage by mortgage and try to give money to homeowners directly? Could they loan money to the homeowners? Could you loan money to banks? Could you buy banks, effectively nationalizing the bank in its entirety? Could you lower interest rates? Could you have a massive stimulus program and just try to throw money into the economy? What could you do to rescue the system? I oftentimes think of the banking system as like a water utility. And the question was basically, do you bring the water to the top of the system and hope it gets to everybody so they can drink the water? Or do you bring buckets to people's individual homes so they can drink it that way?

And that was effectively one of the many questions. And remember, there's a presidential election taking place. Good evening. Four states, Texas, Ohio, Rhode Island, and Vermont hold presidential primary contests today. In the background of all of this, I left my campaign and suspended it. Go back to Washington to make sure that there were additional protections for the taxpayer. The middle class need a rescue package, and that means tax cuts for the middle

class. It means help for homeowners so that they can stay in their homes. Republicans, conservatives thought the idea of giving money directly to individuals, frankly, and even banks was anathema because it meant that the free market system wasn't working. It meant that people weren't taking personal responsibility for what they were doing. This is America. How many of you people want to pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills? Raise their hand. How about we all? Or would we like to at least buy cars and buy houses in foreclosure

and give them to people that might have a chance to actually prosper down the road. And on the Democratic side, the idea of effectively giving money to the arsonists as opposed to giving money to the people was anathema for that side. Today, we're being told that what is good for Wall Street is good for Main Street. Yet this bailout plan will fail to keep families in their homes. What's good for Wall Street is good for Main Street. Not today. There was no way in the moment to have all sides look at this and say, yeah, go ahead. That sounds like a great idea. Because all of these rescue efforts, no matter what they did, was politically unpalatable. Good evening. This is an extraordinary period for America's

economy. So which path do policymakers end up choosing? We are in the midst of a serious financial crisis, and the federal government is responding with decisive action. Basically, they choose what might be described as the trickle-down approach. In announcing an historic bailout for America's banks, President Bush admitted the financial system is in crisis. And they do that two ways. One, they effectively literally inject money directly into the banks themselves and hope

that the banks are going to loan more money out into the public and therefore that money is going to get into the economy. Treasury Secretary Paulson told Congress in a sobering meeting last night that a bailout is the only way to prevent a collapse. And at the same time, with no silver bullet for the economy, the Fed fired a shotgun blast in slashing its benchmark interest rate to the lowest level ever. They start lowering interest rates literally to the point of almost free money. The idea being that all of us can then get loans at a much lower cost, and therefore that money is going to get into the economy. And what's the result of putting these two policies in place? Did they end the financial crisis?

You know, in the immediate aftermath of the crisis, there were real questions about whether these policies were working. It didn't look like it was working. were working. It didn't look like it was working. But over time, slowly but surely, the banks became healthier and they started loaning out money. And because they were able to loan money at interest rates that were so low, it made taking on these loans cheap, both for companies and individuals. Individuals started buying homes. Companies started hiring more people. Those people with jobs started spending more money. And 10 years later, I think empirically, if you were to look at just what took place in 2008, 2009, you'd have to say it empirically, almost unquestionably worked to the degree you look at the top line headline numbers. And you say to yourself, we have a unemployment rate of 3.9%, which is

lower than it was before the financial crisis. You look at where the stock market is today. You look at the economic growth numbers in this country. There's no question that we're in a better place. Having said that, you go below some of those headlines and there's some real questions. Having said that, you go below some of those headlines, and there's some real questions. We'll be right back. You've probably seen a wind farm before, but have you ever heard one? This is the sound of a turbine at the Merkur Offshore Wind Farm in the North Sea. Pick up the New York Times Magazine this Sunday for a new audiovisual experience where you can listen while you look. Within a special Audio Voyages issue, discover the sights and sounds of three unique places featuring GE technology. So the policy solution that people in government came up with in 2008 seems to have worked remarkably well.

It unquestionably worked in the macro sense. But when you really get under the numbers, it was a remarkably uneven recovery. The medicine that was used ultimately almost exacerbated economic inequality in our country. How exactly? The basic answer is that it stabilized the banks to the point where they were able to make money again. And all of a sudden, they're getting big bonuses. By the end of 2009, literally a year later, Goldman Sachs has its most profitable year and is paying out more bonuses than it's ever paid in its history.

But when the Federal Reserve decides to lower interest rates to next to nothing, that means the banks also lower the interest rates they're going to pay you. And that's bad news if you're the average Joe out there with some savings sitting in the bank or you're a retiree relying on the bank paying you some form of interest. A couple of dollars for every $100 you have in the bank is now going down, not up. But if you're of means, all of a sudden you have access to cheap capital. And the banks want to provide a loan to

you. Whereas, by the way, they are not willing to provide a loan to just about anybody else. Right. Because banks, mortgage providers were even more risk averse than before. So they only wanted the people who were the surest possible bets, which are people with plenty of money. Right. And it meant that if you were a home builder, you were incentivized really to only make homes for the wealthiest people, because people of less means couldn't get a mortgage. And so if you have means, you're taking that loan, you're buying a home, you're using money to buy stocks in the market, and you're able to participate in this recovery in a way that so many people can't.

And that's what leads to the divide. And at the same time, the crisis exposed some real structural problems that really predated the crisis but became exposed as a function of the crisis. Nobody was focused on the fact that automation was taking jobs, that wages had just flattened out, they'd stagnated, that workers weren't participating in the workforce. We weren't focused on those numbers in large part because money was so cheap

and loans were so abundant before the crisis that people could live beyond their means. And these policy solutions that have stopped the crisis in this moment, they haven't done much to address these underlying problems. They haven't touched them at all. Andrew, ultimately, what stopped everyone from answering this crisis with a solution that did both, that injected money at the top and injected money into the bottom? It feels very much like the smart people in charge of stopping the financial crisis of 2008 would have had to understand that their solution was going to be a bit one-sided, that it was going to favor people who were already pretty financially comfortable.

I think the view of policymakers at the time is that the most efficient way to stop a panic was to do this top-down, to literally put the tourniquet at the top of the system so that the bleeding would stop. That's how they would think about it. And they would say that the bleeding would stop. That's how they would think about it. And they would say that the Federal Reserve was very limited in what it could do.

All it could do was lower interest rates and for years would call on Congress for fiscal stimulus, for fiscal measures to try to help the economy. And Congress did not heed that call because of politics. Because of the politics, Congress did nothing heed that call because of politics. Because of the politics, Congress did nothing.

Throughout 10 years, Congress did very, very little. The last thing that happened was the stimulus package, and it was much smaller than virtually every economist today agrees it should have been. And that would have answered the question of everybody else in the economy. Had there been more stimulus, had there been other measures, there's no question that that would have helped the rest of the economy. Had there been more stimulus, had there been other measures, there's no question that that would have helped the rest of the economy. And what are the consequences of this for regular people as a result? Those people who, for example, want to buy a home, they aren't investors, they're just middle-class Americans. Ultimately, a sense of less security. a sense of less security because they can't own a home.

They become renters. They are at the whim of the landlord. They can't participate in an economic recovery. They don't have an ownership stake in a home if it goes up. They can't create wealth from a home. 20 million more people are renting now than a decade ago.

It's a remarkable thing to think about. And now they live at the whim of whomever owns their home. And oftentimes that's an investor. That's a speculator. That might be a private equity firm back in New York that's been a beneficiary to a large degree of the bailouts of the banks. And their interest in all of this is simply as an investment.

And that's how they see you, the renter. You know, because of the crisis and ultimately what the crisis unearthed and exposed, I think we realized for the first time that the American dream is truly challenged. This idea that if you tried hard and you went to school, you're going to get a job, you're going to get a job, you're going to have a family, you're going to have access to buy a home with a white picket fence.

That's not available for most Americans today. So this crisis and what we did to solve it isn't what caused the income inequality, isn't what caused so much of the problems people have buying homes right now, for example. But it did reveal a kind of rot beneath the surface. And we didn't really do anything in the middle of the crisis to fix that. Right. We didn't deal with the rot.

We didn't deal with the system. We didn't deal with the banks. We didn't deal with the system. We didn't deal with the banks. The system that existed before the crisis, for the most part, exists today in a very similar way. And I think there are real questions about whether the system should have been changed. I think that there's real questions about whether the way we've conducted capitalism in this country works. Does it work for everybody? It's not a hard stretch to say that capitalism, the way we're operating it today, is not working.

The economy is so strong now and so good. Another month of strong numbers, seven and a half years now of job creation. People are going back to work, and that's really the whole story. That has been the story. We have the lowest unemployment rate in over three decades. The stock market is hitting one all-time record after another.

America's housing market is booming. The economy is going really well and going to get even a lot better. And we are shaking off the worst of that financial crisis for sure. Do you think because the economy is doing pretty well right now, is there any chance that anyone is going to focus on those things at the core of income inequality? Or are we looking now at an era where because things are doing so well, they will once again be ignored?

Look, when things are going well, unfortunately nobody looks at the underlying problems. doing so well, they will once again be ignored. Look, when things are going well, unfortunately, nobody looks at the underlying problems. And I think we're back to where we started, which is we're going to have to wait for the next crisis before people try to address the real issues in our economy. Thank you, Andrew. Thank you, Michael. Here's what else you need to know today. The Times has obtained an email from a lawyer for Christine Blasey Ford informing the Senate Judiciary Committee that Dr. Blasey would be prepared to testify next week so long as senators offer terms that are, quote, fair and which ensure her safety.

But the email says that holding the hearing on Monday, the timetable set by Republicans, The email says that holding the hearing on Monday, the timetable set by Republicans, is, quote, not possible, and the committee's insistence that it occur then is arbitrary. The email also requests a phone call to discuss the terms of the hearings and reiterates that it is Dr. Blossie's, quote, strong preference that there be an FBI investigation into her allegations before the hearings begin. The Daily is produced by Theo Balcom, Lindsay Garrison, Rachel Quester, Annie Brown, Andy Mills, Ike Srees-Kanaracha, Claire Tennisketter, Paige Cowan, Michael Simon-Johnson, and Jessica Chung, with editing help from Larissa Anderson.

Lisa Tobin is our executive producer. Samantha Hennig is our editorial director. Our technical manager is Brad Fisher. Our engineer is Chris Wood. And our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. Special thanks to Sam Dolnick, Michaela Bouchard, Stella Tan,

Alexandra Lee Young, Nina Potok, Abe Sater, and Mike Cordero. That's it for The Daily. I'm Michael Barbaro. See you on Monday. You've probably seen a wind farm before. But have you ever heard one?

This is the sound of a turbine at the Merkur Offshore Wind Farm in the North Sea. Pick up the New York Times Magazine this Sunday for a new audiovisual experience where you can listen while you look. Within a special Audio Voyages issue, discover the sights and sounds of three unique places featuring GE technology.