The Biggest Legacy of the Financial Crisis Is the Trump Presidency
(Bloomberg Businessweek) -- It was late January 2010, and Treasury Secretary Timothy Geithner sat slumped in a leather chair as the afternoon sun cast shadows across his ornate corner office. He’d just gotten off the phone with Federal Reserve Chairman Ben Bernanke. The economy was, if not exactly healthy, light-years ahead of where it had been when he took the job a year earlier—a moment when the world teetered on the brink of another Great Depression. The financial contagion had been halted. Growth had returned. The stock market was 10 months into a bull run that continues to this day.
But Geithner had the weary resignation of a beaten man. I’d been following him for months for a long magazine profile, and this was our valedictory interview, his chance to pull back and make his best case that the Obama administration had rescued the country from financial ruin. Geithner had every confidence they’d made the right choice by focusing single-mindedly on restoring growth rather than indulging what he derisively called the public’s clamor for “Old Testament justice.” But his sales pitch kept dissolving into fatalism.
Three days earlier, Massachusetts voters had delivered a jarring rebuke, choosing a Republican to fill Democrat Ted Kennedy’s Senate seat in a special election that threatened to bring Obama’s agenda to a halt. It was an early sign of the political backlash that has followed the financial crisis like aftershocks from an earthquake. I asked Geithner if he thought popular opinion would ever shift in the administration’s favor. “In the end, what people care about is, What did you do? Did it make things better or not? That’s what you’ll be judged by,” he replied. “Now, will it vindicate the president over time? It should, but I’m not sure it will.” He sighed, then gave a dismissive wave. “I think probably not.”
Geithner’s cynicism was prescient—yet he still didn’t grasp the full scale of the public’s wrath or how long it would endure. He and Obama saw the crisis primarily as a macroeconomic event that could be solved through a series of aggressive technical fixes. As they arranged the mergers, bailouts, and Fed lifelines that rescued corporations from Citigroup to General Motors to Goldman Sachs, they prided themselves on their ability to tune out the public’s justified anger at the greed and recklessness exhibited by financiers and mortgage lenders. This extended even to some clear-cut abuses of the public trust that occurred on their watch, such as when American International Group Inc.—by then a ward of the state—decided to hand out bonuses.
What was so surreal about this period was not Obama’s conviction that growth was a magical elixir that would set everything right. It was his belief that achieving it required him to protect, rather than punish, those who’d driven the economy into the ground. Summoning the chief executive officers of the major banks to the White House in the spring of 2009, Obama told them, “My administration is the only thing between you and the pitchforks.” Like flagellants, he and his economic team were willing to absorb the lashing that should rightfully have been directed at his Wall Street guests, in the belief that shielding them advanced a higher purpose.
Ten years after the crisis, it’s clear Obama was foolish to think public sentiment could be negated or held at bay. Financial crises are every bit as much about politics as economics. How could they not be? Millions of people lost their job, their home, their retirement account—or all three—and fell out of the middle class. Many more live with a gnawing anxiety that they still could. Wages were stagnant when the crisis hit and have remained so throughout the recovery. Recently the Bureau of Labor Statistics reported that U.S. workers’ share of nonfarm income has fallen close to a post-World War II low.
But personal material conditions alone didn’t drive the public response to the crisis. There was a moral component as well. A bitter irony dawning on Geithner at the time of our meeting was that a substantial number of Americans saw the rising stock market not as a gauge of economic revitalization but as an infuriating reminder that the financial overclass responsible for the crisis not only got off scot-free but was also getting richer in the bargain. The iniquity stung. One complaint voters at campaign rallies still share with me is that no Wall Street figure of any consequence served jail time as a result of the meltdown. By contrast, the U.S. Department of Justice prosecuted more than 1,000 bankers after the savings and loan crisis of the 1990s.
In a democracy, the pitchfork-wielding masses will eventually make themselves heard. The story of American politics over the past decade is the story of how the forces Obama and Geithner failed to contain reshaped the world. The day-to-day drama of bank failures and bailouts eventually faded from the headlines. But the effects of the disruption never went away, unleashing partisan energies on the Left (Occupy Wall Street) and the Right (the Tea Party) that wiped out the political era that came before and ushered in a poisonous, polarizing one. The critical massing of conditions that led to Donald Trump had their genesis in the backlash. And the rising tide of economic populism among Democrats makes it all but certain that the next presidential election, and Trump’s possible successor, will be shaped by it, too.
The biggest effect of the financial crisis and its aftermath was a loss of faith in U.S. institutions. Initially, and not surprisingly, this loss of confidence was concentrated in the financial sector. When Obama was first elected president during the depths of the crisis, Gallup reported that confidence in banks had fallen to an historic low. An overwhelming number of Americans (86 percent) cited economic issues as the country’s most pressing problem. But as time went on, the blame spread. Antipathy toward Wall Street eventually became distrust of the government, which not only struggled to mitigate the effects of the meltdown but also began producing its own crises, including a debt default scare in 2011 and a shutdown two years later. In 2013, five years into the recovery, Gallup discovered that Americans no longer considered “economic issues” to be the most pressing national problem: “Government” had replaced them as the top concern.
That shift in blame didn’t happen by accident. The other reason the financial crisis became such a powerful shaping force in our politics is that Republicans (and later Democrats such as Bernie Sanders) weaponized it for their own ends. The architect of this strategy was Senate Majority Leader Mitch McConnell. During the final months of George W. Bush’s presidency, when Lehman Brothers went under and the global economy looked poised to follow, the Kentucky senator helped push through the Troubled Asset Relief Program (aka “the bailout”), a bipartisan bill Bush signed into law a month before the 2008 election. At the time, McConnell lauded TARP’s passage as “one of the finest moments in the history of the Senate,” a comment that earned him the enmity of conservative hard-liners forever after.
But three months later, when Obama was established in the White House, McConnell made the cold-eyed calculation that public anger over the crisis could be harnessed for political gain. He fought the government’s ability to distribute the TARP funds, stoking resentment about bankers and other unworthy parties getting handouts. McConnell made no apologies for this. “We worked very hard to keep our fingerprints off of these proposals,” he told me in 2010. “Because we thought—correctly, I think—that the only way the American people would know that a great debate was going on was if the measures were not bipartisan. When you hang the ‘bipartisan’ tag on something, the perception is that differences have been worked out, and there’s a broad agreement that that’s the way forward.”
The ensuing polarization helped Republicans win the House in 2010 and the Senate four years later. McConnell failed to achieve his goal of making Obama “a one-term president,” mainly because Democrats flipped the script in 2012 and painted Mitt Romney as a Wall Street-friendly “vulture capitalist.”
But anger in politics is a lot like a forest fire—it can quickly burn out of control. By the time Trump declared his candidacy in 2015, Americans of every persuasion had soured on the “elites” running both parties, something his Republican opponents didn’t understand until far too late. Today, his campaign is remembered as having been driven mostly by anti-immigrant animosity. But at Steve Bannon’s insistence, Trump spent loads of time attacking Wall Street on behalf of the forgotten little guy and fanning the suspicion that a cabal of political and financial eminences was screwing ordinary people.
When I interviewed Trump just after he’d locked up the Republican nomination, he told me that he intended to transform the GOP into “a workers’ party. A party of people that haven’t had a real wage increase in 18 years, that are angry.”
His closing message in the campaign consciously evoked the disgust so many people had come to feel toward Wall Street and Washington. His final ad on the eve of the election flashed images of Federal Reserve Chair Janet Yellen and Goldman Sachs CEO Lloyd Blankfein and sought to implicate them, and Hillary Clinton, in what Trump called “a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth, and put that money into the pockets of a handful of large corporations and political entities.” He added, “The only thing that can stop this corrupt machine is you.” It’s no surprise this message struck a chord: What is Trump if not the embodiment of a balled fist and a vow to deliver Old Testament justice?
Since his inauguration, of course, Trump has proved to be anything but the scourge of Wall Street. His central legislative achievement is a tax cut for corporations and the wealthy that has delighted financial elites and pushed markets higher, even as it polls so badly with rank-and-file voters that GOP politicians are hesitant to campaign on it.
Democrats have responded to Trump with a kind of cathartic disinhibition, throwing off the shackles Obama had imposed by holding bankers harmless and agreeing to cut entitlement programs to balance the budget. Lately, the energy on the Left has been around big, budget-busting ideas such as free college tuition and Medicare for all that are themselves a response to the crisis—a ratcheting up of demands on the government by those unhappy with the narrowness of the recovery.
Lurking among these proposals is a long-thwarted desire to square accounts with the Wall Street-Washington establishment that has steered the political economy since the crisis. This is most evident in Elizabeth Warren’s new bill, the Accountable Capitalism Act, which would greatly empower workers at the expense of their corporate bosses while redistributing wealth from the 1 Percent downward (the moral element is right there in the title).
Among the political and financial cognoscenti, these proposals are mostly considered outlandish and have been met with a combination of eye-rolling and derision. They should probably be taken more seriously, since they’re another expression of frustration with a system that hasn’t produced a satisfying recovery for tens of millions of Americans.
Predicting how this energy will further shape our politics is all but impossible. When Geithner and I sat in his office back in 2010 contemplating what might lie ahead, neither of us could have fathomed (nor could anyone else) that one consequence of the financial wreckage would be President Donald Trump. The lesson that stands out all these years later is the same one Geithner was just coming to appreciate: Ignoring popular sentiment always has political consequences, and they’re often ones we can’t possibly imagine.
To contact the editor responsible for this story: Howard Chua-Eoan at firstname.lastname@example.org
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