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Divided Decade

Divided Decade: How the financial crisis changed politics

Tommy Andres Dec 18, 2018
iStock/Getty Images
Divided Decade

Divided Decade: How the financial crisis changed politics

Tommy Andres Dec 18, 2018
iStock/Getty Images

Ten years ago, the economy broke, and today America is a much different place. For the past year, Marketplace has been reporting on how the 2008 financial crisis changed the country. Here is what we’ve learned about how it changed politics.


One of the most dramatic and visible changes in the past decade has happened in American politics, and through our coverage this past year, we’ve learned that the financial crisis was a key contributor to that change. Both the Tea Party and Occupy Wall Street were born from frustrations over the government’s handling of the sinking economy, and those groups helped push the two major U.S. political parties further apart ideologically.

“We saved the economy, but lost the country.”

Kai Ryssdal sat down with the three people tasked with crafting the federal government’s response to the crisis as it was unfolding, including the Troubled Asset Relief Program, which authorized the use of hundreds of billions of taxpayer dollars to save financial institutions without providing assistance to struggling homeowners.

Ryssdal asked Hank Paulson, the author of TARP, how he felt about the choice and its consequences after a decade of reflection.

Timothy Geithner was the New York Fed chair when some of America’s largest banks were failing, and later became Paulson’s successor as Treasury secretary. He stood by the decision to focus on shoring up the financial sector:

Geithner: It is very hard for people to understand that what feels unjust and immoral in the context of breaking a panic is the most just thing to do if your interest is trying to prevent the economy from mass unemployment or a decade of bread lines across the country like what happened in the Great Depression. And it’s a hard thing for people to appreciate in part because we hadn’t had a major financial panic in 75 years. There was no living memory of what the risks were in letting a panic go too far. It’s the central reason why these things are so terrible, because the natural human political instinct around fairness and justice collides with what is necessary and effective to protect the most people.

Ten years later, Paulson, Geithner and Bernanke stand firm that bailing out the banks was the right thing to do, even if it meant not being able to provide significant relief for homeowners. But they know that was a hard pill for Americans to swallow.

Paulson: There was a poll that came out that said TARP was less popular than torture. We worked so hard. We had done something that had pulled the country back from the abyss. But I realized you’re never going to get credit for preventing a crisis that people don’t see.

It was hard for Americans to envision a full-blown economic collapse when what was being experienced on the ground — millions of homes and jobs being lost — was itself so terrible.

Geithner: With the crisis behind us now, at least the financial crisis behind us, and a set of reforms that should make the system safer over time, we’re back to confronting the damage caused by a deeply powerful set of long forces that were eroding the quality of life for the average American. No income growth. Huge rising inequality. Deep anxiety about the future in that context. And I think the crisis made those things seem worse. But you’re now finding people more open to trying to understand those and to think about what you do about them.

The financial crisis revealed the disconnect many Americans feel from the broad economic indicators. Even after a decade of rebuilding and a return to national economic health on paper, the rift remains.

Paulson: We have this economy that’s growing at a fast rate, two and a half to 3 percent, increasing all kinds of jobs. But it’s not going to work for our democracy if we continue to have dysfunction in Washington and we don’t figure out how to make this growth work for more Americans. Too many people are being left behind. You look at these structural changes that are going on, some of which are getting blamed on the crisis, when actually they predated the crisis and they were contributors to the crisis. When you look at automation and the impact on wages that’s coming from that. When you look at the changing nature of work in America — by 2020, half of Americans won’t be working for companies, they’ll be self-employed. The policies we had that used to work for this country aren’t working as well. When Americans know that their political system isn’t working for them, that pushes them to push their politicians in political corners. The economic issues are the flip side of political issues. How to get our economy working for more Americans is the No. 1 question I have.

In order to keep the economy from falling off a cliff, Paulson, Bernanke and Geithner had to convince Congress to give them more power than their positions had ever carried before. This enabled taxpayer dollars to be used to save private companies, something that had been completely foreign to American capitalism until that point.

Those unprecedented moves may have staved off an even greater financial disaster, but they came at a huge cost. As all three men say, “We saved the economy but lost the country,” and in large part that sentence serves as an origin story for today.

The issues of wage stagnation, a growing wealth gap, income inequality and the changing nature of work are all problems that have been snowballing for decades, but the financial crisis brought them into full view, forcing the country to face them in a new way and to re-evaluate what kind of country Americans want this to be.

That reflection has fueled infighting that has led an already hamstrung political system into deep dysfunction, and from the perspectives of the three men on the frontlines in the last big economic fight, a functional political system may be the most important weapon in the fight to save America from the next financial crisis.

What we learned from Chris Dodd and Barney Frank

David Brancaccio sat down with former Democratic Sen. Chris Dodd and former Democratic Rep. Barney Frank at the National Press Club in Washington, D.C. As respective chairs of the House Financial Services Committee and the Senate Banking Committee from 2007 to 2011, they co-authored the Dodd-Frank Wall Street Reform and Consumer Protection Law, the most sweeping set of financial reforms since the Great Depression. They were also both on the front lines for the passage of TARP.

Former Rep. Barney Frank (D-MA), left, and former Sen. Chris Dodd (D-CT) talk about their hallmark legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, on the fifth anniversary of the law at the Newseum in Washington, D.C., in 2015. 

We asked them what role the financial crisis played in rising nationalism across the globe:

Frank: The financial crisis accelerated it and accentuated it, but that’s not the underlying problem. The underlying problem is the nature of growth in developed societies since the ’80s. From the Depression through the World War II post-war period, growth was good for everybody. We grew developed economies in a way that helped the high-end people, it helped working people. And then beginning in the ’80s, growth began to be a two-edged sword. It produced more overall wealth in a country, but it exacerbated the way in which it was distributed. So if you were high-end in America or in other developed societies, if you had a lot of skills, a lot of education, sophisticated in technology, you made money. If your only working asset was an ability to go work hard, without a lot of skills, you got hurt. And so I think that’s the basis for Trump or for Brexit or for the Five-Star Movement in Italy. It is that economic growth in the developed West has evolved to the point where it has a very unequal effect in the economy. I think what happened was in 2010 the perception that the bailout was only for the banks and not others, convinced a lot of people that this unequal result was not simply the workings of an impersonal economy, but the elite were trying to screw them. We are having this increasing inequality in this society and that is undermining faith in democracy.

Dodd then addressed the election of President Donald Trump directly:

Dodd: And someone comes along and promises that “I can make you great again,” and obliquely refers to a time that Barney just described, when those opportunities existed. Failing to recognize that automation and technology and all of these other matters have intervened, making it difficult for that 50-year-old guy who’s just lost his job, who’s sitting in a VFW hall and watching his kids move back into the house. And someone comes along and says: “I can solve your problems.” 

Part of the reason the divide is so stark between economic indicators and what Americans are feeling on the ground is because those who were hurt by the financial crisis missed out the most on the economic gains of the past decade. If you lost a home or your job or your savings, you didn’t have money to invest in the record-breaking bull market. Census data shows that the average income of the bottom 20 percent of U.S. households fell by more than $500 since before the crisis. The top 20 percent saw an average gain of nearly $14,000.

What we learned from Ray Dalio

Ray Dalio was one of the few investors to publicly predict the financial crisis. He is the founder of Bridgewater Associates, the world’s largest hedge fund. He is also the author of a free book titled “A Template for Understanding Big Debt Crises.” In it, he uses economic history to examine today.

“It may sound scary that we have the left and the right at odds or that we may have a wealth gap, but we should recognize those things, and we should deal with them,” Ray Dalio says.

Back in September, he told David Brancaccio that in order to understand where we stand economically and politically, we can look back at the cycle of recovery from the last major economic crisis — the Great Depression. In its wake, there was a similar change in the political winds:

Dalio: Big wealth gaps produce populism [and] produce conflict between the left and the right or the haves and the have-nots. We are also in a period of time, very much like the 1935 to 1940 period, in which the conflict is not only domestic, internal conflict among countries, it’s between countries.

Dalio points to the current trade war with China as further proof that a similar post-Depression cycle is playing out:

Dalio: When we elect populist leaders, they are strong nationalist leaders who tend to have conflict. So we’re in a position in which there is a rising power in the form of China and an existing power in the form of the United States. Through history, there’s a pattern in when that rivalry happens of conflict. At first, that’s economic conflict, and then later it can become even military conflict.

But does Dalio really believe a war with China could be in our future?

Dalio: I don’t mean to scare anybody, but I do think that it’s important to realize that we do have a competitive situation with China. That means conflict of some form, and how that conflict is handled should be considered in light of history. In other words, there are good ways of doing that and there are bad ways of doing that. More dangerous. And it’s a delicate situation. So yes, there are economic conflicts internally. It may sound scary that we have the left and the right at odds or that we may have a wealth gap, but we should recognize those things, and we should deal with them.

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