The 2008 economic crisis defined the last two presidential elections — and may do so in 2016, too.
The good news for Republicans is that Hillary Rodham Clinton should be weakest on a key element of the crisis: bank bailouts. The bad news is that the GOP still hasn’t found a way to talk about the government’s role on Wall Street. That role isn’t either all or nothing.
Clinton has been clear on bailouts: She’s against them. Stephen Colbert asked her two weeks ago about large financial firms: “Do we let them fail this time?” “Yes, yes, yes, yes, yes, yes, yes,” she said.
Except . . . she voted for the Bush bailouts back in 2008.
People often say that any criticism of TARP, the Trouble Asset Relief Program, is demagoguery. But that’s not true. Congress fell down in its job first by being so surprised by the financial crisis and then by not asking questions about TARP and other rescues before they voted.
There’s no reason, for example, that Washington had to protect the large lenders to firms such as AIG and Citigroup. These lenders, usually other big companies, were sophisticated and should’ve known that lending to other opaque financial firms carried a risk.
Protecting the big lenders, insurers and banks 100 percent wasn’t necessary to fix the economy, and sent a bad signal that we still see today: People know that financial firms have the government’s protection, while ordinary folk must suffer the consequences of their bad decisions or bad luck.
Despite her enthusiastic answer to Colbert, Clinton is still leaving herself room to do what the government did in 2008. In her Colbert interview, she focused on shareholders. “Shareholders have to know that, yes, they will fail,” she said.
But in 2008, the government and the markets did impose huge losses on shareholders.
It’s the large lenders to financial firms that the government protected. To prevent another debt-fueled bubble and crisis, we had to show lenders that they would suffer losses — so that they wouldn’t lend too much again.
The Republicans have an opening here. In last week’s Fox Business debate, The Wall Street Journal’s Gerard Baker asked candidates whether they agreed with Clinton on bailouts. The answers were less than impressive.
Jeb Bush said that the government should limit how much banks can borrow, so that they don’t get themselves in so much trouble again. True enough — except he didn’t say it in a way that anyone could understand.
Marco Rubio said the Obama administration’s financial-reform law (Dodd-Frank) made too-big-to-fail worse — also true, but he didn’t say what he’d do about it other than repeal the law, which most people know won’t happen.
Ted Cruz gave a clear answer on bailouts: “absolutely not.”
But a moderator followed up: “If Bank of America were on the brink, you would let it fail?” Cruz backtracked. He said the Federal Reserve could lend a failing bank money at high interest rates.
Why do candidates sound muddled or inconsistent on bailouts? Because they know they’ll look too harsh if they say everyone should lose his or her money in a financial crash.
John Kasich stumbled toward a solution here, saying he “would figure out how to separate those people who can afford it versus those people” who can’t.
Guess what? We already have a way to protect regular people in a bank failure so that the bank itself — its shareholders and its lenders — can fail. It’s called the FDIC.
The FDIC is government insurance of small bank deposits — under $250,000 — so that everyone else can go through the process of tallying up their losses.
This system is eight decades old, and it works.
A limited social safety net allows market forces to work. Without that safety net, market forces can’t work, because the costs to society are too high, as we saw in the Depression.
It wouldn’t be so hard for voters to grasp a good Republican explanation here: When a president wields limited government power well, he can prevent a crisis that would have required more
But it does take some subtlety — which is different from confusion.