During the week of September 15, the country’s economic leaders did a quick 180-degree turn: They went from assuring us that the economy was just fine to telling us that the bottom was about to fall out and a second Great Depression loomed just over the horizon. The one hope was a massive $700 billion bailout package for the banking industry that Treasury Secretary Henry Paulson put forward in a three-page document the following weekend.
Once this document was put on the table, corporate media abandoned any pretense of neutrality. With few exceptions, they refused to raise questions about whether the bailout was necessary, whether the need was as urgent as claimed, or whether the basic structure of the bailout was feasible.
Furthermore, with few exceptions, the media downplayed and/or trivialized efforts to put conditions on the bailout or to ensure that homeowners facing foreclosure got some kind of protection. “[Congress-members’] best shot at success depends on keeping the debate tightly focused on the questions that matter most,” wrote New York Times reporter David Leonhardt (9/24/08). “Everything else—reducing executive pay on Wall Street, changing the bankruptcy laws, somehow slowing the descent of home prices—is either a detail or a distraction.”
In the same vein, media decided that anything that the Bush administration and the congressional leadership viewed as necessary to pass the bill was acceptable behavior. They did not apply the sort of scrutiny to their comments and actions that would be expected for the debate around such an important piece of legislation. Finally, critics of the bill were treated as unthinking and ill-educated, even though this group included many of the country’s most prominent economists.
Prior to the week of September 15, both Paulson and Federal Reserve Board chair Ben Bernanke had repeatedly assured the public that the problems in the housing market were limited and did not pose any threat to the larger economy. Bernanke told the Washington Post (10/27/05) in the fall of 2005, just after he was nominated to his current position, that there was no housing bubble.
Bernanke assured Congress in March 2007 that “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained” (New York Times, 3/29/07). Paulson likewise dismissed the threat of crisis (Reuters, 4/20/07): “I don’t see [subprime mortgage market troubles] imposing a serious problem. I think it’s going to be largely contained.” As recently as July 2008, Bernanke was still predicting the economy would continue to grow, albeit at a slow pace (USA Today, 7/16/08).
While the collapse of Fannie Mae and Freddie Mac in September 2008, followed by the collapse of Lehman Brothers and AIG, did qualitatively change the situation, it would have been reasonable to question the judgment of people who had proved to be completely wrong about the economy. While New York Times columnist Paul Krugman documented Paulson’s long record of major mistakes in one of his columns (9/22/08), much of the rest of the media acted as though this background was irrelevant, rarely referring directly to Paulson or Bernanke’s past mistakes or citing anyone who did so.
As the Los Angeles Times editorial board told its readers (9/30/08):
No one in Washington has a better view of the global credit markets than Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke. So when they say the situation is dire, it’s not as if a couple of flightless birds were saying the sky was falling.
This was important, because there were very basic questions about the feasibility of the bailout as Paulson originally proposed it. Economists from across the political spectrum argued that Paulson’s approach wouldn’t work; 230 of them signed an open letter protesting the bailout on September 24, which got virtually no coverage in mainstream media. The overwhelming majority of economists argued that a system of direct capital injections, which Paulson eventually adopted, was far more practical than his original plan to buy up bad assets.
Similarly, there were questions about the urgency of the bailout. Paulson and Bernanke insisted that immediate action was necessary, using this as an argument against worrying too much about the details of the plan, and much of the media went along for the ride. On PBS’s NewsHour (9/24/08), Washington Post columnist Ruth Marcus opined, “Everybody understands, in the end, we need a fix, we need a big fix, and we need it quickly.”
CNN chief business correspondent Ali Velshi (9/28/08) called the bailout “absolutely” essential, arguing:
While we would all love to have the luxury [of] not having this bailout plan or the luxury to take a month to talk about it, anybody that tells you that deadline was imposed upon them just doesn’t know enough about financial markets to be involved in making those decisions. This was urgent.
Yet Paulson took no action for 10 days after the bill had been passed and was signed by George W. Bush.
The urgency was also an argument against addressing important related concerns in the bailout measure. For example, many progressives in Congress wanted to change the bankruptcy law to allow judges to change the terms of a mortgage, just as they can with any other debt. This would allow hundreds of thousands of homeowners to stay in their homes. Similarly, many urged the inclusion of a stimulus package to counteract the recession that was clearly getting worse. Ultimately, the bill approved by the Senate did include a wide range of extraneous provisions, most of which were special interest tax breaks.
Yet the view that the bailout was not urgently needed was rarely presented in news articles. Furthermore, those who questioned the need, urgency or efficacy of the bill were denounced in numerous columns or editorials (e.g., USA Today, 9/26/08; San Diego Union-Tribune, 9/30/08).
Did ‘conditions’ mean anything?
Leaders in Congress made a big point of touting the changes that they put in the bailout bill. In particular, they noted that the $700 billion requested by Paulson would not come all at once. Instead, only $250 billion would be given right away. Bush would then have to certify that another $100 billion was needed. This money would be available automatically within 10 days, unless Congress took action to stop it. Similar conditions were attached to the last $350 billion.
But for practical purposes, the use of the $700 billion in the bill approved by Congress was at Bush’s discretion in the same way as he had originally proposed; in effect, Congress would have to override a presidential veto to stop the full $700 billion from being used. The conditions meant nothing, yet this fact was almost never noted in the reporting on the bill.
The bill was supposed to include restrictions on executive compensation. As a practical matter, it is unlikely that the restrictions will reduce the compensation of any Wall Street executive; media noted this fact only after the bill was passed (Washington Post, 10/4/08; Wall Street Journal, 10/6/08).
The failure to restrict executive compensation effectively means that the tax dollars of ordinary workers are going to subsidize the highest-paid people in the country. Furthermore, these highly paid bankers are getting this subsidy precisely because they failed at their jobs and their failure is threatening to wreck the economy. In Germany and Britain, serious limits were placed on executive compensation.
Similarly, efforts to ensure that taxpayers got a fair return on investment were also largely ignored. While members of Congress touted the commitment to protect taxpayers’ investment, the reality was that the bill gave Paulson a blank check.
When he actually did invest capital in banks, he got an extremely low return, less than half of what Warren Buffet had received for his investment in Goldman Sachs just two weeks earlier. Unlike the bailout in England, Paulson did not prohibit paying out dividends, a measure that would have helped the banks more quickly build their capital. This failure and the bad investment deal meant that taxpayers were directly subsidizing the banks’ shareholders, in addition to subsidizing their executives.
Media join the sales team
The initial defeat of the bailout package on September 29 stunned the political establishment, leading them to pull out all the stops to reverse the congressional action. The Financial Times ran a piece titled “Congress Decides It Is Worth Risking Depression” (9/30/08). This was not the first time the Great Depression had been offered up as a consequence of not passing the bailout bill; in the week prior to the bailout vote, the threat of a return of the 1930s was thrown around liberally in the press (e.g., U.S. News & World Report, “Bailout Prevents Great Depression 2.0,” 9/22/08; PBS Nightly Business Report’s XChange, 9/24/08, “Why Won’t Paulson and Bernanke Use the Words ‘Great Depression’?”).
This was an irresponsible scare tactic: It would take a full decade of incredibly misguided economic policy to lead to the 10 years of double-digit unemployment we had in the ’30s. However, in the push for the bailout, scare tactics were entirely acceptable. When Bush and other politicians used the term “Great Depression,” the appropriate media response should have been to call the public’s attention to the fear-mongering, rather than to reinforce its impact.
Then we had New York Times columnist Thomas Friedman writing (10/1/08), “We have House members, many of whom I suspect can’t balance their own checkbooks, rejecting a complex rescue package because some voters, whom I fear also don’t understand, swamped them with phone calls.” The Washington Post (9/30/08) ran a column by Dana Milbank that exclaimed: “In the Congress of the United States, the insane are now running the asylum. . . . Pelosi and Blunt aren’t in charge anymore. The lunatics are.”
The titles of Washington Post editorials gave a clear picture of what that paper thought was happening: “Congressional Neroes: Republicans and Democrats Fiddle as the Economy Burns” (9/30/08); “A Test of Leadership: John McCain and Barack Obama Need to Build Support for a Financial Rescue Package” (10/1/08), (which called the failure to the pass the bill a “colossal failure of American leadership”); and “America’s Second Chance: The House Has One More Shot at Making Financial Order out of Chaos” (10/2/08). Ironically, this (ongoing) scare campaign is likely contributing to the severity of the downturn, since it is leading consumers to contract their spending far more quickly than might have otherwise been the case.
Wielding the Dow
Even the sharp decline in the stock market was fuel for proponents of the bailout. When the Dow plunged by 778 points (7 percent) on the day the bill was voted down, Bush, Congress and the media immediately seized on this decline as evidence of the urgency of the bailout, blaming the loss of more than $1 trillion in stock wealth on the bill’s opponents (e.g., Washington Post, 9/30/08; New York Times, 9/30/08; CNN Money, 9/29/08).
Unsurprisingly, when the market fell even more following the bill’s passage later in the week, these outlets failed to blame the decline on supporters of the bill. In reality, the stock market’s day-to-day movements are determined overwhelmingly by psychological factors, which is why serious people don’t use these movements as arguments for or against legislation. (Not that a high stock market is always good—see Extra!, 7-8/02.) But to get the bill passed, the rules were discarded.
In effect, the media created a situation in which opposition to the bailout became politically untenable for members of Congress. The economy was certain to face serious problems regardless of whether the bailout passed or not. However, if the bailout didn’t go through, then the media would hold its opponents responsible for every subsequent piece of bad economic news. In short, the media gave members of Congress the choice of whether they wanted to be blamed for the worst economic downturn since World War II. Not surprisingly, most members of Congress opted not to be blamed and voted for the bailout.
Remarkably, Paulson ended up following the path advocated by many of his critics, explicitly abandoning the plan to buy up bank assets that he had proposed to Congress. The irony of this reversal received little attention from the media.
Dean Baker is co-director and Kris Warner is a research associate at the Center for Economic and Policy Research in Washington, D.C.