The front page of the New York Times says it all this morning: “The treasury secretary told a House panel that failure to provide A.I.G. with the $85 billion bailout would have been “catastrophic” for the economy.” Both Paulson and Geithner also defended their actions with the old warning about the imminence of a “second Great Depression.”
As I noted yesterday, Geithner is also telling us that a failed Bernanke confirmation effort would have catastrophic consequences for financial markets. Geithner and other Wall Street policy elites are old hands at this: they’ve used the same rationale for every massive financial bailout of the past generation, from the Mexican bailout to Long Term Capital Management to AIG.
Notably, they’ve used the same excuse to argue against financial regulation. When Brooksley Born wanted to regulate derivatives, Summers, Rubin, and Greenspan told her that she was going to cause a financial crisis. Of course, the opposite was true: they didn’t regulate derivatives, and it caused a massive financial crisis.
This is Wall Street’s Big Lie at work. It makes for good headlines — just like the weapons of mass destruction rationale for entering Iraq — and scares people into supporting Wall Street’s agenda. But it has no basis in reality, and oftentimes the opposite is true. Economist Dean Baker always does a good job of refuting this excuse (as he did during the 2008 bailouts).
Enron is a particularly good example, as I wrote yesterday, because ex-Treasury Secretary Robert Rubin said essentially the same thing about the company: that an Enron collapse would imperil world energy markets. Of course, there was no bailout, Enron went bankrupt, and the markets did not collapse.
Again, quite the opposite was true: as long as Enron continued to do business, it threatened the integrity of world energy markets. In California, Enron traders manipulated the electricity supply in order to bring in massive profits. The company caused historic, rolling blackouts throughout the state. The destructive consequences included a substantial increase in the state’s debt.
And California was a template for what Enron wanted to do to the rest of the country, if not the world. Good thing Rubin didn’t prevail on that score. Still, the Big Lie works, more often than not, and continues to do untold damage to our economy.