By Greg Ip and Jacob M. Schlesinger
It took deeply unpopular bailouts costing hundreds of billions of dollars to help end the most-recent economic crisis. Policy makers swore they'd never do it again. "There will be no more tax-funded bailouts -- period," then-President Obama declared in 2010.
A decade later, they've done it again. Late Wednesday, the Senate passed an even bigger package of bailouts and stimulus to address the coronavirus pandemic, with a speed and degree of consensus that was largely absent in the last episode. The House of Representatives is expected to pass the legislation as soon as Friday, and the White House has said President Trump would sign the law immediately.
What changed? Veterans of the last go-round say the underlying causes and thus the politics of the crises are completely different. The prior bailouts went to banks and financiers, who were blamed for helping cause the crisis, but who needed saving because they were essential to providing credit to the mainstream economy, from Fortune 500 companies to mom and pop stores.
By contrast, the current bailouts are aimed at the mainstream economy itself, much of which has ground to a halt as governments have ordered businesses closed and asked people to stay in their homes.
"Nobody is accused of doing anything bad this time. There are no villains," said former Rep. Barney Frank, who as a top Democrat in Congress helped secure passage in 2008 of the $700 billion Troubled Asset Relief Program, or TARP, which injected money into banks, securities markets and car companies.
During the last crisis, support for ordinary homeowners was undercut by worries about rewarding undeserving borrowers. Those "moral hazard" concerns are absent now as policy makers err on the side of generosity with loans.
On housing, "we were penny-wise and pound-foolish," said Neel Kashkari, who helped run TARP as a Treasury official and is now president of the Federal Reserve Bank of Minneapolis. "The housing downturn was more severe because the program was too narrow."
These days, the Republican Party has also changed. Back then, many of its rank and file members opposed bailouts and fiscal stimulus, preferring markets be left alone.
President Trump has remade the GOP into a populist, nationalist party less exercised by trillion-dollar deficits, more critical of big business behavior such as share buybacks and more comfortable pressuring private companies to support their political agenda.
The package, estimated at $2 trillion, includes about $350 billion in forgivable loans to small businesses, $250 billion in increased unemployment insurance and $300 billion in direct payments to households.
It also includes $500 billion in loans to airlines and other big business, most of which will be financed by the Federal Reserve with losses backstopped by the Treasury. Secretary Steven Mnuchin indicated Thursday that the government would take stakes in airlines in exchange for billions in direct grants to the companies.
In scale, these loans could exceed those of 2008-09, which successfully stopped the run on the financial system and helped General Motors Co. and Chrysler Corp. reorganize in bankruptcy protection and emerge profitable. Those moves helped generate a recovery that became the longest on record, and TARP even turned a modest profit for the government.
But what many remember from a decade ago is that after the banks were bailed out, the stock market and financial industry rebounded, while ordinary workers and homeowners struggled with stagnant wages and underwater mortgages.
That perception fueled populist backlashes in the form of the Tea Party on the right; Occupy Wall Street on the left; and the presidential campaigns of both Mr. Trump and Sen. Bernie Sanders.
Wary of that political price, negotiators this time imposed stiffer conditions on companies to better tilt the benefits toward workers, and away from executives and shareholders.
Much of the wrangling that held up the deal in the Senate in recent days was over how to oversee the loans to big businesses. The resulting increase in influence over companies has the potential to reshape the relationship between the government and business.
In August 2007, securities backed by subprime mortgages tumbled in value amid mounting defaults. The Federal Reserve first responded by lending prodigiously to banks and securities dealers and lowering interest rates.
By early 2008, though, the financial crisis had deepened and spilled over to the wider economy. A recession was later determined to have begun in December 2007.
A series of bailouts followed, until Lehman Brothers, which was deemed too troubled to rescue, went bankrupt in September 2008. A few weeks later, Congress approved TARP, which empowered the Treasury to directly buy shares in weakened companies.
In addition to the bailouts, Congress passed tax rebates of $152 billion to aid households, and, in early 2009 a $787 billion stimulus, made up primarily of tax cuts and credits to households, aid to states and support for infrastructure and other public projects.
This time, as the financial markets have seized up, the Fed has responded much as it did then: with lower interest rates, generous loans to banks and securities dealers, facilities to extend credit to blue chip companies and, as of Friday, municipal governments.
But in 2008, financial market stress was the cause of the economic crisis; now, it's the symptom.
"The Fed has the tools to provide as much cash as the economy needs," said Mr. Kashkari. "What's much harder to solve is all the businesses that will be shutting their doors for an indefinite period of time."
In the current relief package, instead of bailouts of financial institutions, taxpayer cash is going to Main Street businesses so they can meet their bills, pay employees and keep their doors open.
The estimates of the financial hit are staggering. Accommodation, food service, leisure, hospitality and retail trade alone represent 10% of America's gross domestic product, and employ 33 million, with a monthly payroll of $74 billion.
Much of that is at risk as government-imposed shutdowns spread. Economists surveyed last week by The Wall Street Journal expect the economy to shrink 4% to 10%, annualized, in the April to June quarter, on a par with the 8.4% drop recorded in the fourth quarter of 2008. Some see the drop exceeding 20%.
The speed of the plunge is also unprecedented. A record 3.28 million workers applied for unemployment benefits last week, up from 211,000 three weeks ago and nearly five times the previous record high in 1982.
It took more than a year from the start of the financial crisis for Congress to pass TARP, and four more months to pass the $787 billion stimulus. The current bailout and stimulus come barely two months after the first diagnosed U.S. coronavirus case.
"Back then, we didn't see how bad it was at first," said Mr. Frank. "It's clearer now that what has to be done is pumping out a lot of money."
In 2008, President George W. Bush was a lame duck with limited sway over his party's insurgent conservatives. TARP initially failed in the House, with a majority of Republicans opposed. After the stock market cratered, the House passed an amended version.
After Mr. Obama took office in January 2009, Republicans united against both his stimulus plan and Fed efforts to stimulate growth.
Almost every Republican opposed his $787 billion stimulus, with some deriding it as a "sugar high."
Some see the current package as a sign of how much Mr. Trump has co-opted the Republican Party and the Tea Party movement. The precise impact of the latest effort on the deficit is unclear, but could exceed $1 trillion. As with TARP, some of the loans to businesses are expected to be repaid.
Some government officials argue this generation of loans shouldn't be called bailouts, because they are cushioning businesses from government-imposed measures to stop the spread of the coronavirus, not from their own mistakes.
Marc Short, chief of staff for Vice President Mike Pence, who as an Indiana congressman voted against bailouts in 2008, said on CNBC Friday that the two cases aren't comparable. "This is not a market failure," he said. "It's not really an apples to apples comparison."
While a different sort of crisis and a changed Republican party have smoothed the way for bailouts, the conditions are tougher, reflecting hardened attitudes among Democrats.
TARP imposed limits on executive compensation, dividends and stock buybacks. But recipients were still free to pay bonuses, often to the same people whose actions had helped precipitate the crisis. As the largest banks repayed their TARP funds over the following year, their obligations ended. They raised dividends and resumed buybacks.
One prominent critic was current Massachusetts Sen. Elizabeth Warren, then a Harvard University professor who headed a Congressional panel overseeing the program. She said in late 2009 that taxpayers "are bombarded with news that Wall Street firms that benefited from TARP with windfall quarterly profits are now preparing to reward their executives handsomely with hefty bonuses" -- while unemployment was close to 10% and loan defaults continued to rise.
The architects of the 2008 bailouts have said that they couldn't make conditions too draconian or punitive, because they needed all banks -- whether healthy or weak -- to accept the terms. They said they needed full participation because the crisis threatened to take down the entire industry.
Today, though, if an airline or hotel or cruise line fails, it wouldn't trigger a domino effect of failures. That gives the federal government leverage to impose tougher conditions on its aid.
At the outset of the current negotiations, Sen. Warren proposed requiring recipients to pay a $15 minimum wage within a year, maintain payrolls, forgo share buybacks and set aside at least one board seat for a worker representative.
The Senate-passed bill includes some of those conditions, and adds others. While criteria vary depending on the type of aid and company, recipients generally cannot lay off more than 10% of their employees, buy back stock, pay dividends, or outsource or offshore jobs. There are tight limits on executive compensation, and companies must remain neutral during union organizing drives.
The past decade's financial crisis and bailouts reshaped the relationship between finance and the rest of American society. Banks are far more tightly regulated and increasingly tout their performance on broader social, not just financial, goals.
The same could happen now that the U.S. is about to become a creditor and, potentially, shareholder in American companies. Just how much Washington should flex that influence is likely to be fiercely debated in coming months.
At Democrats' behest, the loan program will be overseen by an inspector general within Treasury and a congressionally appointed commission to assess the impact of loans on the financial well-being of Americans, the U.S. economy and its financial system.
Ahead of the deal, potential recipients appeared resigned to having lots of strings attached. Boeing Co. on Friday suspended its dividend and share repurchases and said its chief executive and chairman will forgo any pay for the rest of the year. Airlines have agreed to eliminate buybacks and dividends over the life of a federal loan and limit executive compensation.
Businesses warned that too many conditions will defeat the purpose if they deter companies from participating or impair their ability to operate and recover. On Tuesday, Boeing's CEO suggested it might not accept aid if it must grant shares to Washington as a condition.
After the Sept. 11, 2001, terrorist attacks, Congress approved $10 billion in loan guarantees to the airlines. In the end only $1.6 billion were authorized.
Nicholas Calio, who served in the Bush White House at the time and is now chief executive of Airlines for America, the industry trade group, said in retrospect the 2001 program didn't help as much as intended in part because of the restrictions and burdens in how it was administered.
In the current crisis, he said the airline industry was healthy just a few weeks ago, and is already doing everything it can to help itself such as restricting executive pay and idling planes. "What the government will be doing is providing a bridge to a better time," he said.
In the last crisis, the failure of the bailouts to significantly alleviate foreclosures and the feeling that banks were treated more generously than indebted Americans stoked resentment.
The Bush administration encouraged investors and loan servicers to voluntarily modify mortgages but made little progress.
Later, the Obama administration used TARP to launch a program aimed at reducing monthly payments for up to four million delinquent homeowners. But after a year, just 390,000 had qualified, according to TARP's independent inspector general, and ultimately just one million successfully modified their loans.
The reasons were slipshod processing by private loan servicers and tight eligibility criteria. Those terms were put in place because the administration was wary of rewarding those who didn't qualify or had taken excessive risks amid scrutiny by the inspector general. That added a dimension of who was "deserving" of help.
Jared Bernstein, who was chief economist for then-Vice President Biden in 2009, recalled "being in the room when the political operatives were saying, 'We can't do this because of moral hazard, because of the optics. We can't help Mr. Jones when Mr. Brown across the street has been paying his mortgage every month.' " That dynamic, he said, isn't present today.
In the current crisis, small businesses are in the vulnerable position that homeowners were previously. They face the evaporation of revenue needed to pay debt, rent, utilities and salaries.
The new legislation sets about $350 billion in federally guaranteed loans to cover those expenses for the next few months. Those who maintain most of their payrolls would have their loans forgiven.
That's far more generous than loan programs in previous crisis around the world, according to the Program on Financial Stability at Yale University. It is closer to a grant than a loan. The approval process would determine the ultimate cost and success. Too tight, and not enough firms will participate to meaningfully dent layoffs. Too loose, and taxpayers will reward many businesses to do what they would have done anyway.
The Fed's Mr. Kashkari said the lesson of the last crisis is to err on the side of too loose. Aiding some businesses that don't really need it is "better than taking a decade to rebuild the labor markets," he said.
Write to Greg Ip at email@example.com and Jacob M. Schlesinger at firstname.lastname@example.org
(END) Dow Jones Newswires
March 26, 2020 14:34 ET (18:34 GMT)
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