David Warsh: Looking back at a big U.S. mistake and a great success
A protester on Wall Street in the wake of the AIG bonus payments controversy is interviewed by news media during 2008-2000 financial crisis.
SOMERVILLE, Mass.
If you strip away all that we have learned since, in order to look back at the election of 2016, the remarkable thing is that Donald Trump didn’t defeat Hillary Clinton by a wide margin then {and lost the popular vote by 3 million votes} and win re-election in a landslide. He was against America’s war in Iraq; soft on Russia; tough on China; phobic on immigration, especially from Mexico. He deplored blue-collar criminals, talked up investment in infrastructure, and sought tax cuts for corporations and the well-to-do. In a nation eager for change, Trump was a television populist running against a Yale Law School elitist who possessed an indelible record in government going back twenty-five years. Only climate change was missing from his platform.
The election was close mainly because a large number of swing voters, just short of preponderance, understood that Trump was a shady character who played well on fears. We know now that he is rotten to the core, at least most of us do, Republicans as well as Democrats. Yet the issues that Trump brought to the 2016 election remain at center of the of the 2024 campaign. While President Biden adopted as many of Trump’s positions as he dared, and modified others as much as he could, Trump’s all-but-forgotten core political agenda dominates debate today.
But never mind Trump, and his cunning political instincts. A better way to think about America’s future is to reflect on how the three decades unwound since the end of the Cold War, and ask, in the simplest possible terms, how events could have been otherwise. Arguments range the length of the policy spectrum – abortion, inflation, inequality, health care, mass incarceration, gun control, civil violence – the list is long. My aim here is to identify two overarching American policies with global reach that brought us to the present day. One has been a spectacular failure; the other, a brilliant, if inconspicuous, success.
The failure has been NATO enlargement, which Russian President Vladimir Putin asserts that the U.S. disavowed in 1990 in return for the acquiescence of the former Soviet Union to the reunification of Germany within NATO. Expansion was barely noticed when President Bill Clinton’s administration sought, in 1992, to admit Poland, Czechoslovakia and Hungary to the alliance. After Clinton added Estonia, Latvia, Lithuania, Bulgaria, Romania, Slovakia and Slovenia to the list of prospective members in 1997, Russia began to take umbrage – all the more so after Vladimir Putin took over in 2000.
George W. Bush paid little attention to Putin’s objections, and in 2008 put Ukraine and Georgia on the path to membership. Putin expressed strong opposition, starting and winning a small war, in Georgia. After Hillary Clinton and John Kerry kept up the NATO pressure as secretaries of state under President Obama, Putin annexed the Crimean Peninsula and began battling for portions of eastern Ukraine.
By the time that Trump began pandering to Putin, it was too late to change course. Secretary of State Antony Blinken last November signed a “strategic partnership charter” with Ukraine; the next day, Putin commenced planning an inept invasion of his sovereign neighbor. Finland and Sweden have signed on to the alliance in protest, but six months into a proxy war with Russia, NATO, if not Ukrainian President Volodymyr Zelenskyy, has lost sympathy in much of the rest of the world. Meanwhile, China’s plans to absorb Taiwan lie just over the horizon. Joe Biden has said the U.S. intends to prevent it. America’s deeply unpalatable alternative to war there is the same as it was in Ukraine. Let the weak negotiate with the strong, and do what it can to prepare itself for Cold War II.
And the most successful U.S. policy since 1990? That would be the management of the global monetary system by the Federal Reserve System, in concert with the central banks and treasuries of other leading nations, including China and Russia. I am not thinking of the “Great Moderation” of the Nineties and the run-up in the Oughts to the crisis that began in 2007. I doubt that sequence is as yet very well understood. But there should be no doubt about what happened in 2008. Under its primary mandate to serve as “lender of last resort” in a banking panic, the Fed led a desperate effort to fund and implement the response it had quietly organized in the course of the year before to halt the stampede that began after Lehman Brothers failed – a firebreak, not a “bailout.”
Had the panic continued, a second Great Depression might have taken hold, perhaps even more stubborn and costly to resolve than the first. There should be no doubt about what happened in 2008, yet to this point there is mainly confusion. The best book may still be Last Resort: The Financial Crisis and the Future of Bailouts (Chicago, 2018), by Eric Posner, but it is not good enough. Understanding in some detail the Fed’s response to the panic is important for what it says about the prospects for responding effectively to climate change. (In the same way, much can be learned from the rapid success of the multinational campaign to develop a COVID vaccine.)
“NATO enlargement” and “The Panic of 2008,” are on their way to becoming tropes, catch phrases, figures of speech, that evoke complicated historic developments, much as “The Titanic,” “The Guns of August,” “Pearl Harbor,” “Dunkirk” and “D-Day” do today. The process of distillation takes time and much exploration by countless interpreters. This is a weekly column; I try to keep it under a thousand words, eight paragraphs or so. But I return to these topics, and a few others, again and again, adding new material and elaborating.
The mistakes involved in “NATO enlargement” have yet to be acknowledged; central bankers’ resourceful response to “The Panic of 2008” is still poorly understood. To learn more, I can only suggest for now that you keep reading.
David Warsh, a veteran columnist and an economic historian, is proprietor of Somerville-based economicprincipals.com, where this column originated.