David Warsh: In the Panic of 2008, Bush did the right things

Headquarters of doomed Lehman Brothers.

SOMERVILLE, Mass.

At a time when the antipathy between Republicans and Democrats is at a fever pitch, it is worth recalling the desperate events 10 years ago when America’s center held together very well after the collapse of Lehman Brothers precipitated a financial panic, the first in many decades, that seemed to come out of nowhere to threaten a depression even worse than that of the 1930s. The White House put its full support behind the Federal Reserve Board’s role as lender of last resort. Congressional leadership of both parties reluctantly backed the president.

Two attempts were required to persuade the House to authorize the Treasury Department’s $700 billion supplement to the Fed’s own funds. The second succeeded, the measure passed, and U.S. leadership galvanized the central banks of the United Kingdom, the European Union, Canada, Sweden, Switzerland and Japan in a coordinated monetary easing.

In late September, 2008, 12 of the 13 most important U.S. financial firms had been at the brink of failure, Federal Reserve Chairman Ben Bernanke later told the Financial Crisis Inquiry Commission. By mid-October the unbridled fear had given way to full-alert wariness. Much of the credit for stemming the panic belongs to George W. Bush, who put the full force of his presidency behind the effort, before stepping out of the way of the presidential-election campaigns. (His wise choices weren’t obvious at the time.)

Instead of horrific gridlock, the U.S. economy sank into a deep recession.

A persistent itch remains to blame the crisis on the Bush administration, at least in some quarters. After all, Bernanke, Treasury Secretary Henry Paulson and New York Federal Reserve Bank President Timothy Geithner were hired during his watch, Geithner (by the New York Fed) in 2003, Paulson and Bernanke in 2006. Two books arguing against the heroic interpretation of their performance of the roles have appeared recently.

The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster (Cambridge), by Laurence Ball, of Johns Hopkins University, argues that Bernanke and Geithner had the authority to save the troubled investment bank whose failure initiated the panic and that the central bankers were bullied by Paulson out of doing so. A Crisis of Beliefs: Investor Psychology and Financial Fragility (Princeton), by Nicola Gennaioli, of Bocconi University, and Andrei Shleifer, of Harvard University, claims that the Lehman failure should have been no surprise, that policy beforehand should have been more aggressive, and that the systemic run on the banking system was unpredictable was mostly a myth. (Shleifer, unfortunately, didn’t predict it.)

Neither interpretation is likely to stand up to professional scrutiny. The first-person accounts of the policy-makers – Bernanke (The Courage to Act), Paulson (On the Brink) and Geithner (Stress Test) – and the wealth of supporting material that has grown up around them are likely to remain the primary narrative of the crisis.

Today another crisis of great magnitude threatens, this one involving the U.S. Supreme Court. Once again former President Bush is involved, this time as a key supporter – as of last Thursday – of nominee Appeals Court Judge Brett Kavanaugh

It was Bush who hired Kavanaugh into the White House as an assistant counsel in 2001, who promoted him to staff secretary in 2003. (Those who followed the tribulations of Rob Porter, former staff secretary to President Trump, will know something of the close bond that develops between a president and the supervisor of his decision-making queue.) Bush presided over the marriage of his long-time personal secretary Ashley Estes to Kavanaugh in 2004, then two years later nominated his fellow Yale alum to the federal appellate court bench.

Bush last week reiterated his support of Kavanaugh after the testimony of Christine Blasey Ford, having earlier told Politico, “Laura and I have known and respected Brett Kavanaugh for decades, and we stand by our comments the night Judge Kavanaugh was nominated.” On that occasion he had said, “He is a fine husband, father, and friend – and a man of the highest integrity. He will make a superb justice of the Supreme Court of the United States.”

Then came the dramatic news that the Federal Bureau of Investigation would spend an additional week digging deeper into the nominee’s past. Meanwhile, the significance of Judge Kavanaugh’s partisan and untrustworthy testimony last week will continue to sink in. It won’t get any easier for the former president to maintain his support.

Probably no opinions outside the Senate, public or private, matter more to the fate of his nomination than those of George and Laura Bush.  The Republican Party is in disarray. If it still has a leader, it is Bush.

David Warsh is a Somerville-based columnist and economic historian, as well as proprietor of economicprincipals.com, where this column first appeared.