Michael Meeropol: Why Hillary Clinton's Opinion Of The Bank Bailout Of 2008 Matters
When Hillary Clinton ran for President in 2008, she lost the nomination to Barack Obama because she had voted for the Iraq War and he had made a speech against it. Should Secretary Clinton declare her candidacy for the Presidency, I am wondering if her vote in favor of the bank bailout in 2008 will come back to haunt her in a similar way.
Back in 2006, right after the Democrats took control of the Senate and House, I argued that there was a battle raging for the soul of the Democratic Party. On one side were the Democratic Leadership Council folks, symbolized by former President Bill Clinton – a man who as President presided over major steps to deregulate the financial system, a man who signed so-called welfare reform and NAFTA and did nothing to help Labor Unions staunch the decline in their memberships. On the other side were people such as newly elected Senator Jim Webb of Virginia who represented a more populist approach to economic policy.
That division still exists in the party and it plays out in two alternative approaches to the 2016 campaign.
One approach would be to celebrate the Obama Administration’s efforts to combat the great recession and stimulate the recovery. Democrats could argue that all the doom and gloom predictions of the Republicans about the stimulus, the Affordable Care Act; the actions of the Fed to keep interest rates down have not come true. There has been no explosion of inflation despite a long standing low interest (actually NO interest) policy by the Fed. The private sector has created millions of jobs, the unemployment rate is back where it was before the crisis hit in 2008, and the government made a profit on all the financial assistance to banks. Thus, electing a Democrat to the Presidency in 2016 and returning the Senate to Democratic control will continue all the good stuff and prevent the Republicans from making things much worse with ridiculously draconian budget cuts to finance large tax cuts to high income people.
The alternative approach, and one supported by the populist wing of the Democratic Party (including former Senator Webb who is currently exploring a Presidential run of his own) to stress the contradictions of the recovery from the Great Recession. Productivity growth has been substantial – BUT – The median income of year round full time workers is lower today than it was in 2007. Official unemployment is down – BUT -- the employment to population ratio is a full three percentage points lower than it was in 2008.
This, by the way, is a very important piece of information. The reason we measure unemployment is because it is an indicator of the waste of human resources. These are people ready, willing and able to work but the economic system cannot generate enough incentives to hire them. Because they keep growing older, their potential to work is gone forever while they are unemployed. What the official statistic does not count are those who have dropped out of the labor force because they have exhausted unemployment benefits and have given up looking for work. The employment to population ratio measures how close we are to utilizing all the human resources available. That three percent of the labor force is lost output as well as lost income. Finally, as a result of the housing bubble and subsequent financial crisis, millions of people have lost their homes. Efforts to reduce principal owed to reduce the number of people subject to foreclosure have been purely voluntary. The proposal to permit homeowners who have been foreclosed to stay in their homes and pay market rent have gone nowhere in Congress and have drawn no official support from the Administration despite some prominent endorsements from the New York Times editorial page and former President Clinton. (See HR 2580 introduced by Representative Grijalva: https://www.congress.gov/bill/113th-congress/house-bill/2580. I detailed how this would work in a previous commentary but for details see http://www.cepr.net/issues/r2r/ and the sources linked there.)
The banks are back on their feet, larger and more profitable than before the crash. They successfully weakened financial reform when the Dodd-Frank Bill was first debated and are successfully stalling full implementation of its provisions.
(See “How Wall Street Defanged Dodd-Frank THE NATION.com)
The top 1% has gained almost all the increased income that has been experienced since the official end of the recession in 2009. Thus, inequality has increased. The recovery has been for the banks and the super-rich --- not for the rest of us.
Now consider two alternative views of the rescue of the financial system in 2008-2009 – the bailout. Government policy hit a “reset” button and permitted the financial system to avoid virtually all of the pain generated by the housing bubble and the 2008 crisis. Some say it was the only way to prevent a rerun of the Great Depression. Others think the government missed a golden opportunity. Yes, a couple of firms failed and some were forced to merge. However, the surviving entities came back bigger and stronger and more powerful. By rights their stockholders should have been wiped out and their bond holders should have become stockholders – that is shorn of their guaranteed returns. Their executives should have all lost their jobs and some who committed wholesale fraud to create the housing bubble should be on trial or in prison. In exchange for the bailout, the banks could have been forced to write down mortgages, cut back on bonuses, and take other actions that would promote improvements for the rest of the population. Instead, homeowners, workers, public employees and those who utilize government services have been forced to pay the costs associated with the financial meltdown. They have paid in layoffs of government employees because Congress has responded to the weakness of the recovery by reverting to austerity instead of expanding on the stimulus from the Recovery Act. They have paid in the slowness in the recovery of jobs as evidenced by the decline in the employment to population ratio. They have paid in the stagnation of incomes for the vast majority of the population.
What does Hillary Clinton think about all this? Yes, she’s in favor of a rise in the minimum wage – that’s easy. What about policies to make it easier to form unions and force businesses to be serious about negotiations? What about policies to get wages up all across the board? Does she think the Obama Administration made all the right moves in the financial sector and the recovery effort in general? If the campaign for the Democratic Party nomination is nothing but a coronation, she might dodge all of these issues. The only hope for a full airing of the differences between the populist wing of the Democratic Party and those who supported the bailout but shied away from a more vigorous response to the recession and financial crisis is either for Secretary Clinton to experience a personal conversion or to feel herself pushed by a strong opponent in the primaries. There is a third possibility -- a groundswell of complaints about the non-recovery for the 99 percent.
I urge people to demand from Secretary Clinton a detailed statement of her views on the policies enacted to combat the financial crisis and the great recession. What does she think of what was done? What would she have done differently? And why? In 2008, she realized her vote in favor of the Iraq War had been a big mistake. We should insist that she own up to a similar view of her vote in favor of the bailout with not enough strings and come up with a set of proposals that will make all of the rest of us feel the recovery from the great recession. We also need a series of proposals to create real reform of the financial system.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.
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