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AUSTIN, TEXAS - Thank you for that warm welcome. It is a pleasure to be back in Austin.
My thanks to the University of Texas and especially to the McCombs School, the Law School, and the LBJ School for sponsoring this event.
I’m the Assistant Secretary for Financial Stability at the Treasury Department. That means I oversee the Troubled Asset Relief Program, or “TARP” as we call it.
But it really means I have the honor of overseeing one of the most unpopular government programs in recent memory. Unpopular, but also one of the most effective.
The fact that TARP was unpopular is no surprise. Americans were rightfully angry that we had to use taxpayer dollars to help private banks, especially those run by executives who were very well paid. It’s a program that nobody in government ever wanted to do. But it was born out of the extraordinary circumstances our country faced in the fall of 2008.
At that time, we weren’t just facing another recession. We faced the very real risk of a catastrophic collapse of our financial system and a second Great Depression. Doing nothing was simply not an option.
So my goal tonight isn’t to make you all love TARP. Tonight, I’d like to talk about why we acted, what actions we took, and why TARP and our other emergency measures worked. And I will also talk about leadership, because when you look beyond the facts and figures, the government’s response to the financial crisis is really a story about strong, successful, and bipartisan leadership.
These actions were the result of tough decisions that were made when there were very few good options. And it required leaders to take actions they knew weren’t popular, but were the right thing to do for the country.
These actions were taken by both a Republican and a Democratic President, and with bipartisan support in Congress. These actions involved strong leadership from the Federal Reserve. And as a result, our government responded with overwhelming force and speed to stop the crisis and make a faster economic recovery possible.
I think this is an important story to tell right now. With no shortage of political battles in Washington, it’s understandable why some Americans are questioning government’s ability to confront the big challenges of our time.
The response to the financial crisis provides a very different example.
The law that created TARP was passed by Congress with broad support from both Republicans and Democrats.
It was proposed and signed into law by President Bush President Bush said in his memoir that it was a choice between sticking by his economic philosophy of not intervening in the economy or taking the actions that were necessary to prevent a depression. He chose the latter. As President Bush said after he left office,
“I was worried about the economy going down, and I believe TARP saved the economy.”
TARP was also supported by President Obama during his presidential campaign. The Bush Administration started the job of combating the crisis, and the Obama Administration worked to finish it by continuing to implement TARP and implementing other measures, including the Recovery Act.
This is also a tale of leadership by appointed officials, including most notably Chairman Ben Bernanke of the Federal Reserve, former Secretary of the Treasury Henry Paulson, and current Treasury Secretary Tim Geithner, who was head of the New York Federal Reserve Bank when the crisis began. They and others worked together to design and then implement the wide range of programs that helped stave off a depression. The risks were huge, the pressure was great and there was no playbook or standard procedure to follow.
In short, the story of this financial crisis that isn’t often talked about is a story of leadership, of courage, of taking bold action and making tough decisions that were unpopular but necessary.
While there is still a lot more work to do to fully repair the economic damage from the crisis, it’s safe to say that without the government’s powerful response, the fallout would have been far worse and the costs would have been far higher. Moreover, all of the government’s interventions taken together may even result in a profit for the American taxpayers.
How many government programs can you think of that were adopted with bipartisan support, succeeded in what they were designed to do, and came in way under budget? It’s almost enough to maybe make people hate TARP a little less.
So this is an important story to tell right now. And I think the University of Texas is a very appropriate place to tell it. That’s because TARP and the other actions taken draw inspiration from someone who has a strong connection to this university. In fact, the building which houses your College of Communication is named for him. That’s Jesse Jones.
For those who aren’t familiar with Jesse Jones, he was a successful businessman and developer from Houston. He was responsible for building many of the skyscrapers that still stand as part of the Houston skyline today.
And in 1933, he was asked by President Franklin Roosevelt to become Chairman of the Reconstruction Finance Corporation, which played a key role in stabilizing the financial system and rebuilding the economy during the Great Depression. Jesse Jones had bipartisan support and became so powerful as Chairman of the RFC that he was known as “the fourth branch of government.”
In many ways, the RFC was the TARP of its day:
It provided assistance to thousands of banks during the Depression, just as TARP did during this financial crisis.
It prevented the railroads from collapsing, just as TARP saved the American auto industry.
It helped ensure that lending to American families and businesses did not dry up, just as TARP did through programs to support the credit markets.
And it took action to prevent foreclosures and help people stay in their homes, just as TARP has done for families coping with today’s housing crisis.
And it was Jesse Jones who later said, when reflecting on the work of the RFC,
“[The] improvement in the wellbeing of everyone…did not just happen…It is the result of government taking a constructive, determined stand for the welfare of its people under a leadership that combined vision, courage, and action.”
Jesse Jones was talking about the RFC but his words could just as easily describe the government’s response to this financial crisis. The fact that our financial system did not collapse in 2008 and that we did not fall into a second Great Depression is not just luck. And the improvement in our economy that we have seen in recent quarters is not just coincidence.
These things are the result of strong leadership and bold action.
It is, to use Jesse Jones’ words, the result of “government taking a constructive, determined stand for the welfare of its people under a leadership that combined vision, courage, and action.”
WHY WE ACTED
So now let’s go back to the fall of 2008 and revisit why it was necessary to act in the first place, and then discuss what we did.
In September of 2008, our country faced the worst financial crisis in generations. The forces that brought about this situation had been building up for a long time. We do not have time now to revisit them, but they included a housing bubble fueled by a combination of factors including easily available mortgages, excessive debt by households and businesses, a regulatory system that was outdated, and an insensitivity to risk by investors. These forces reached a crescendo in the fall of 2008.
That’s when Lehman Brothers filed for bankruptcy. That may not rank as one of those moments when you will always remember where you were when it happened. But this watershed event was like throwing gasoline on a fire that was already very threatening.
The housing bubble had burst many months earlier. Several large financial institutions had already failed. Fannie Mae and Freddie Mac had been placed into conservatorship by the government a week earlier. As Lehman fell, every major financial institution was threatened. The stock market dropped 500 points, and AIG was on the verge of collapse. At that point, we faced the very real risk of a collapse of our financial system.
Perhaps you remember that famous scene from the movie It’s a Wonderful Life, with Jimmy Stewart, when the townspeople panicked and tried to withdraw their funds from George Bailey’s little savings bank all at the same time? That was what it was like in the Great Depression.
This time, the day after Lehman fell, we also saw the classic signs of a generalized run on our entire financial system. Except this time, people were not lining up outside the community bank. Today, all it takes is mouse clicks and wire transfers to move money. And institutions were doing just that, and it was gaining velocity quickly.
People were losing trust and confidence in the stability of major financial institutions and the capacity of the government to contain the damage was vanishing.
I was in private law practice in New York at the time, and I dealt with many of the nation’s major financial institutions. I have never seen that level of fear and uncertainty on the part of many very experienced businesspeople. As just one example, I recall very financially sophisticated individuals quietly discussing whether to withdraw as much cash as possible from ATM machines, in light of the uncertainty they feared.
In short, in the fall of 2008, there was a very real risk that our economy could have been plunged into a second Great Depression.
TARP’S EFFECTIVENESS
The situation required an immediate and coordinated response by several parts of the federal government including the Federal Reserve, Treasury, the FDIC and other agencies. So what did the government do?
We stabilized the banking sector by investing in more than 700 financial institutions. This included the nation’s largest banks, as is well known, but it also included many small community institutions, including several here in the Austin area.
We took action to restart the secondary lending markets. Long gone are the days when your local bank provided all your needs for loans or other financial services. Today, complex secondary markets provide the financing for student loans, small business loans, auto loans and other types of consumer lending. Those markets had frozen, and we took action to jumpstart them.
We took action through Treasury and the Federal Reserve to prevent the failure of AIG. This was one of the most difficult, but also consequential decisions of the crisis, because AIG got itself into trouble through gross mismanagement of risk. But it was the largest insurance company in the world at the time. Millions depended on it for their life savings, and it had a huge presence in many critical financial markets, including municipal bonds. And so the government acted, because In those circumstances, at that time, AIG’s failure would have been devastating to global financial markets and the stability of the economy.
The Federal Reserve launched a variety of programs to provide liquidity to financial institutions and markets and to keep interest rates low.
The FDIC increased the insurance available on bank deposits.
We prevented a collapse of the American automotive industry, because disorderly liquidations of GM and Chrysler would have resulted in a million more jobs being lost, and would have been very damaging to an economy already deeply in recession. And contrary to what some have said, we prevented that collapse through the normal procedures of the nation’s bankruptcy courts, in accordance with well settled law. The only difference was the federal government –first under President Bush, and then under President Obama--provided the funds to keep them afloat, because private industry would not.
And we took action to stabilize the real estate market, by keeping mortgage rates low and helping struggling families avoid losing their homes to foreclosure.
So let’s look at where we are today – and I brought several charts with me to help illustrate the progress we’ve made.
Worst Recession Since the Great Depression
The first chart shows just how severe the recession was.
The black line is this recession, the other lines are earlier recessions, and this shows the reduction in economic growth. And so you can see that this recession was far more severe than earlier ones. Approximately 8.8 million jobs were lost, compared to less than 1 million in the 1974 recession. Americans lost over $19 trillion in household wealth.
GDP
The second chart shows how our economy contracted and then how quickly economic growth resumed. The bars represent gross domestic product for each quarter in 2007, 2008 and 2009, and plotted against that are the key events in the crisis as well as the response.
By the end of 2008, the economy was contracting at an annual rate of more than 9 percent. But by the middle of 2009 – only a few months after our emergency responses began – GDP began to recover. By the third quarter of 2009, GDP was back in positive territory and it has remained there, though it is not as strong as we would like it to be.
Retirement Savings
The third chart I wanted to share with you shows what’s happened to retirement savings since our response programs began.
These two lines track the performance of both the stock market and peoples’ retirement fund assets since 2007. You can see how steep the drop was during the financial crisis in 2008 and how they’ve recovered in the years since. Again, we still have some work to do, but there is no question that our response programs paved the way for retirement savings to recover.
Lending
Next, we show what’s happened to credit, or lending. Lending always falls in a recession, because banks are less willing to lend, and because there is less demand for loans. But the response to this crisis helped minimize that fall and helped speed the recovery. This shows bank lending standards tightening, and then easing, over time in a manner similar to the pattern in the earlier charts.
Auto Industry
This chart shows how jobs have come back to the auto industry—over 200,000 since the restructurings of GM and Chrysler.
Now, we still have more work to do to recover fully from this crisis. Unemployment is too high, the housing market is still weak, and the rate of economic growth is not yet fast enough. But we are making progress.
And we are also fixing many of the problems that caused this crisis. Our banking system is stronger today because it has much more capital and it is less dependent on short term funding. We are reforming our regulatory system in several ways, including by creating the means to wind down financial institutions that pose a risk to our overall stability, and by bringing the derivatives market out of the shadows.
Expected Cost of the Financial Stability Programs
Finally, let us consider the direct cost of this response to taxpayers. While it is not the measure of success, it is nevertheless important, and something you are entitled to know.
I’m sure many of you remember that Congress originally authorized $700 billion for TARP. Many thought we would never get that money back. And people thought that TARP, combined with the other emergency response programs, would cost hundreds of billions or even trillions of dollars. This chart shows some of the estimates.
The good news is these estimates turned out to be wildly off the mark.
The response to this financial crisis will rank, not only as one of the most effective, but also as one of the least costly emergency responses ever implemented.
We’re confident that taxpayers won’t see the kind of losses that many feared during the dark days of the crisis. In fact, the government is now expected to at least break even on the financial stability programs, and may in fact, realize an overall positive return.
Let me highlight a few aspects of this. First, the investments we made in banks have already turned a profit. That is, we have already recovered more from the banks than we put in, and we will add to this profit as we continue to wind down TARP.
Second, the various actions that the Federal Reserve took to provide greater liquidity to the markets are resulting in a profit.
Third, we currently expect to break even, or possibly make a profit, on the support provided to AIG. That is based on current market prices, which could change. But as of today we’ve already reduced that support by 75 percent.
Although there will be a cost associated with our auto industry interventions, analysts both from the auto industry and outside, estimate that these programs saved jobs and prevented the disorderly liquidation of auto companies which would have been far more costly both to the industry and to the economy.
There will be a cost associated with the assistance to Fannie Mae and Freddie Mac, though that is likely to be reduced over time.
And there will be a cost related to our assistance to helping people avoid foreclosure, which is money that was never expected to be returned.
But when you consider that these efforts have directly helped more than one million people avoid foreclosure and indirectly helped millions more by setting new standards throughout the mortgage servicing industry, I believe this was money well spent.
Overall, the areas where we will realize profits are expected to more than offset the losses.
You can find a lot more detail about the costs of the crisis response on our website. The charts I have shared with you are part of a larger presentation that the Treasury Department has released, showing the impact of the combined actions taken by the federal government in response to the financial crisis. You can access the complete set of charts at Treasury’s website – Treasury.gov.
CONCLUSION
Let me conclude on this note. The financial crisis caused massive damage and a lot of pain that continues for millions of Americans. Its effects were not fair, and we must never forget that the true cost of the financial crisis will always be measured in lost jobs, lost savings, and lost economic growth.
But because we acted forcefully during the crisis, as a result of strong leadership by both Republicans and Democrats, the damage was not as great, and the costs were not as high.
We have more work to do to get our economy back to full strength And as that happens, we must turn to the task of putting our government’s finances on a long-term sustainable path.
But as we continue working to address these challenges, the success of our response to the financial crisis serves as a powerful reminder that our government is still capable of mobilizing to meet great challenges.
But it is not easy. As I said at the outset, these were unpopular actions. And politicians may look back at the substantial political cost involved in doing these things and be deterred from taking necessary but unpopular actions to meet other challenges in the future. And that is why it is important that we understand what we did in this crisis, and why it was necessary.
It is my hope that the lessons we ultimately learn from this crisis are that we acted quickly, decisively, wisely, and in a spirit of shared responsibility, and that as a result, we succeeded in making a bad situation much better. And it is my hope that if we remember that lesson, our nation will be better able to confront the challenges we face in the months and years ahead.
Thank you.
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