Why the 2008 Bailout was the Problem, not the Solution: A Critical Analysis of Lest We

Forget: Why We Had a Financial Crisis and It Was a Low-Down, No-Good, Godawful

Bailout. But it paid.

Caroline Thompson, 100490147

Dr. Scott Aquanno

International Politics and Policy

November 26th, 2014

The 2008 Subprime Crisis is a popular topic in prominent economic journals, as seen in

Forbes’ Lest We Forget: Why We Had a Financial Crisis, and the Washington Post’s It Was a

Low-Down, No-Good, Godawful Bailout. But it Paid (Denning, 2011) (Sloan & Burke, 2011).

While these articles touch on the key players in the crash and subsequent bailout, it will be

argued in this paper that the narratives presented in these articles lack critical information, which

will be presented here within an historical and international context by drawing on Albo (2002),

Blyth (2013), and McKinnon (1993). This paper will start with a summary of Denning (2011)

and Sloan & Burke (2011), followed by a comparison and critique of the two. Lastly, there will

be a discussion of what can be learned from this analysis, and what these critiques mean in the

larger political and economic context.

Article Summaries

In Lest We Forget: Why We Had a Financial Crisis, Denning criticises current literature

on the 2008 financial crisis for focusing blame on the state and its poor regulation of the

financial sector, and argues that the crisis was in reality a result of the private sector’s drive for

profit. In support of this argument, he points out that state actions contributing to the crisis were

pushed by financial sector lobbying, such as legislation that limited risky investments being

repealed in 1998, and the erosion of state laws regulating mortgage credit and national banks.

Apart from finance-controlled state actions, Denning also notes dangerous actions being taken

directly by Big Finance. This includes the Wall Street’s compensation schemes that encouraged

short-term successes over long term stability, incentivizing risk, as well as the explosion of

derivatives into a market several times the size of the global economy. He then focuses even

smaller, arguing that human nature had an important role in the crisis, which he argues was in

part driven by those too stubborn to admit the flaws in their ideology, those who simply did not

understand the math and the facts, those who knew of the looming crisis but pushed it even

further for their own profit, and lastly those who were simply paid to stay silent. He concludes

these ideas with the argument that the prevention of similar crises in the future can only come

from regulatory reform of the private sector. Overall, his analysis focuses on the actions of

individuals rather than considering larger institutions, or actors’ interactions with the larger

context.

Sloan and Burke cover a different issue, defending the bailout that came in the wake of

the 2008 financial crisis. They argue that society has been unfairly negative towards the bailout,

which, they argue, was not a costly failure, but a necessary, and successful solution to the larger

problem of the crisis itself. Their perspective agrees with that of Denning, stating that excesses in

the financial system caused the crisis, though they do not elaborate on these causes, or even

suggest any long term solutions to the crisis. First, in praise of the bailout, they argue that it may

have been followed by a serious recession, but in fact it prevented a complete international

meltdown that would push society into a second Great Depression. While popular opinion was in

favour of the Lehman brothers going bankrupt, this created a domino effect of damages to the

economy that could only be stopped by a bailout. Sloan and Burke further argue that financially,

taxpayers and the government have ultimately come out ahead after the bailout, citing increased

profits in the Federal Reserve and increased securities ownership by the Treasury, which leaves

taxpayers with a net profit. Though they recognize that the economy post-bailout has still

suffered much damage in the form of lost jobs and homes for the middle class, they argue that

the situation could have been much worse. Taxpayers, Sloan and Burke assert, should be happy,

because they “almost miraculously, are coming out ahead rather than hundreds of billions of

dollars behind” in the wake of the 2008 crash. They argue that we as a society should be grateful

that the situation is not even worse than it is, but they do not pay much consideration to the less

desirable situation that led us to this necessary solution, or what further courses of action will

prevent further crises that demand such solutions.

Critiques

While Denning is correct in downplaying the state’s role in creating the financial crisis,

his analysis is limited by its treatment of Big Finance as the key factor. Increasing regulation of

the private sector is a small-scope solution that does not recognize the larger problem of

neoliberalism. The dangerous courses of action taken by Big Finance are not unique to this

context, but are endemic to neoliberalism, as seen in Blyth’s analysis of the European crisis: in

contrast to the Classical Liberal notion that economic actors make fundamentally rational

decisions to profitable and economically sound ends, banks instead took on the debt with the

highest risk, not because of its potential for profit—interest rates did not accurately reflect risk—

but because of the policy built into the system that ensured that bailouts would await any

failures, eliminating any incentive to limit high-risk investments (Blyth, 2013). This not only had

no benefit to the economy, but in fact ruined it as these ‘rational’ actions, having been taken by

many investors at once, left more damage than any relevant economic body could repair.

Because the weakness that led to this crisis is built into neoliberalism, the solution cannot be

simply to reform legislation on institutions within the macro-context, but must confront the

macro-context itself. Similarly, the weaknesses in regulation that spurred the 2008 crisis also

arise out of neoliberalism rather than through individual actors. As Albo argues, the nature of

neoliberalism strengthens the market by limiting state power, and weakening real choice in

policy (2002). The state therefore has little autonomy and cannot be seen as a relevant actor in

the crisis, either as an independent body, or one driven by the private sector.

Further suggesting Denning’s lack of awareness of the larger context is his assertion of

the role of human nature in the financial crisis. While he thoroughly explains its relevance in this

context, he does not address why the same human nature present in other monetary regimes has

not led to the same crisis, which points further to the importance of the larger context of

neoliberalism than simply the actors within it.

In comparison with Sloan and Burke’s analysis, Denning does still adequately emphasize

the hand that the financial sector had in the development of the crisis. By pushing the important

issue of the crisis itself to the side to analyse the bailout in isolation, Sloan and Burke fail not

only to understand public scorn of the bailout, but also to recognize that rather than being a

problem and a solution respectively, the crash and subsequent bailout are collectively one crisis

of neoliberalism, just as the European crisis was a single event characterized by financial excess

followed by heavy public spending. By under-emphasizing the role of finance in the crisis, Sloan

and Burke are one step even further behind Denning in recognizing neoliberalism’s inherent

weaknesses, as he adequately assesses that there is in fact a problem that can be fixed, even if his

solution has its limits. In contrast, Sloan and Burke simply accept the legitimacy of neoliberalism

to the extent that they do not question it even in the face of a crisis that arises directly out of its

core features. It is only by this logic that they are able to unironically suggest that the average

taxpayer should be grateful for the imperfect ‘solution’ presented to them, rather than, rightly, to

be angry at the crisis that it is a part of—one that comes from the political-economic regime of

neoliberalism which naturally shifts the state to an unempowered role, making deregulation the

norm, and allowing market actors to freely act in dangerous, high-risk methods of profit,

abandoning the Classical Liberal notion of rationality knowing that their failure is equally

profitable. The deliberateness of Big Finance’s actions here as in the European crisis points in a

different direction than Sloan and Burke’s narrative of the crash, which paints it as an event not

worth taking action against, but simply recovering from and not further considering. This in turn

builds to a further weakness of their analysis.

While Sloan and Burke argue that the bailout was a successful solution by suggesting a

net profit, they miss the larger issue: if it is a solution, what is it truly solving? Even in following

their, and Denning’s logic which blames the crisis on Big Finance as individual actors, the

bailout does not improve the economy’s long term stability because it rewards, and further

incentivizes, those responsible for the reckless behaviour that led to the crisis, and even further, it

makes no move toward Denning’s proposed regulatory reform. Thus, while Sloan and Burke

believe that taxpayers should be grateful, they show no justification that they should be

optimistic. And yet, neoliberalism rather than Big Finance was the root cause of the crisis,

therefore a regulatory reform is neither feasible nor adequate for truly solving it, which leads to

the analysis’s greatest weakness, that it does not challenge neoliberalism itself.

The notion of the bailout as a solution demands even deeper analysis. It only solved the

crash insofar that it prevented a much worse crisis. It did not solve it in the framework that points

to financial actors as the key factor in the crash because they have only been further incentivized

in making high risk investments, as investors were in Europe. What it truly solves is the crisis of

the potential loss of neoliberalism. It is noteworthy that Sloan and Burke argue that the bailout

prevented another Great Depression, because the Great Depression similarly arose as, or at least

as part of, a crisis of the current monetary regime—the Gold Standard (McKinnon, 1993). While

much greater suffering was felt, taxpayers truly had something to be grateful for, because a new

monetary regime was created that aimed to fix the weaknesses of the Gold Standard (McKinnon,

1993). In contrast, while taxpayers may “come out ahead” on the bailout, it does not lead to, but

rather stands in the way of, a real solution to the problem of neoliberalism itself.

Conclusion

A common limitation of popular economic literature, as seen here, is its lack of

consideration for the bigger context of the events it analyses. Emphasizing the importance of

individual actors such as Big Finance, as Denning does, limits the effectiveness of any proposed

solutions, because it ignores the root causes of the problem. Treating the crash of 2008 and the

subsequent bailout as separate events rather than two halves of the same crisis is equally

problematic. As seen in the European crisis, public spending in the face of a crisis of private

spending is not simply an option, but the only effective one, and therefore a natural reaction to

the initial problem. But these two problems were fundamentally linked in Europe, as investors

took risks in anticipation of this bailout—proof that a bailout in the face of crisis is not simply

possible, but inevitable, being a built-in feature of neoliberalism, and thus one that is easily

exploited by the financial sector. Therefore, any true solution to the crash cannot come in the

form of meso-level reform, but must come as an overhaul of the entire system of neoliberalism.

If history is to be believed however, it may be necessary to suffer through another Great

Depression for this to happen, and thus our escape from such a fate in 2008 may not be

something to be grateful for, but angry.

References

Albo, G. (May, 2002). Neoliberalism, the state and the left: A Canadian perspective. Monthly

Review 54 (1) pp. 46-55.

Denning, S. (November 22nd, 2011). Lest we forget: Why we had a financial crisis. Forbes.

Retrieved at: http://www.forbes.com/sites/stevedenning/2011/11/22/5086/

Blyth, M. (2013). Europe—Too big to bail? The politics of permanent austerity. Austerity: The

history of a dangerous idea. (pp. 51-93). New York: Oxford University Press

McKinnon, R. I. (March, 1993). The rules of the game: International money in historical

perspective. Journal of economic literature 31 (1) pp. 1-44.

Sloan, A., & Burke, D. (July 9th, 2011). It was a low-down, no-good, godawful bailout. But it

paid. Washington Post. Retrieved at: http://www.washingtonpost.com/business/it-was-a-

low-down--no-good-godawful-bailout-but-it-paid/2011/07/05/gIQAbmIZ3H_story.html