Don’t Call It a Bailout: Washington Is Haunted by the 2008 Financial Crisis

WASHINGTON — On that summer day in 2010 when he signed new legislation regulating the banks after the worst financial crash in generations, President Barack Obama declared, “There will be no more tax-funded bailouts. Period.” Standing over his right shoulder just inches away and clapping was his vice president, Joseph R. Biden Jr.

Nearly 13 years later, Mr. Biden, now himself a president facing a banking crisis, appeared before television cameras on Monday to make clear that he remembered that moment even as he guaranteed depositors at failing institutions. “This is an important point: No losses will be borne by the taxpayers,” he vowed. “Let me repeat that: No losses will be borne by the taxpayers.”

He could not even bring himself to utter the word “bailout.”

Washington remains haunted by the specter of government intervention after the banking sector collapse that triggered the Great Recession, leaving leaders of both parties determined to avoid any repeat of that painful period. The colossal bailouts initiated under President George W. Bush and continued under Mr. Obama arguably saved the global economy but also provoked such a ferocious popular backlash that they transformed American politics to this day.

The notion that “fat-cat bankers,” as Mr. Obama once called them, should be rescued by the government even as everyday Americans lost their jobs, their homes and their life savings so rankled the public that it gave birth to the Tea Party and Occupy Wall Street movements and undermined the establishment across the political spectrum. In some ways, that popular revolt empowered populists like Donald J. Trump and Bernie Sanders, ultimately helping Mr. Trump to win the presidency.

“Today’s populism is firmly rooted in 2008,” said Brendan Buck, a top adviser to two Republican House speakers, John A. Boehner and Paul D. Ryan, who were both eventually targeted by Tea Party rebels within their own party. “The bailouts not only fostered distrust of corporations, but cemented the notion that elites always do well while regular people pay the price. Bailouts were also followed by a large expansion of government, and while it all may have prevented much worse calamity, the recovery was slow.”

Mr. Biden, of course, knows all that intimately. He saw it up close, watching the public uprising from his office in the West Wing while counseling Mr. Obama on how to respond. Even the separate economic stimulus package that Mr. Obama assigned Mr. Biden to manage came to be tainted because many Americans confused it with the bank bailouts.

And so now, as he endeavors to head off a crisis of confidence after the failure of three financial institutions in recent days, Mr. Biden wants to avoid not just a run on the banks but a run on his credibility.

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“The term and the idea of bailouts are still highly toxic,” said Robert Gibbs, Mr. Obama’s first White House press secretary. He said Mr. Biden rightly focused on accountability for those responsible and sparing taxpayers the cost. “Those are two important lessons learned from 15 years ago. Emphasizing that the ones being helped are instead innocent bystanders who just had money in the bank is why a backlash on this action is less likely.”

But Republicans were quick to pin both the crisis and potential resolution on Mr. Biden, accusing him of fostering economic troubles by stoking inflation with big spending and labeling government efforts to head off escalation of the crisis the Biden bailout.

“Politically, if you ask me what’s the impact of bailing out rich techies in California — which is exactly how this will be played — then the answer is Donald Trump’s likelihood of re-election just went up three to four points,” said Mick Mulvaney, who came to Congress as a Tea Party champion and later served as Mr. Trump’s acting White House chief of staff.

In repeating that taxpayers will not bear the cost of bailing out depositors at the failed banks, Mr. Biden noted that the cost will be financed by fees paid by other banks into the Federal Deposit Insurance Corporation, or F.D.I.C. What he did not mention was that a separate loan program that the Federal Reserve has opened to help keep money flowing through the banking system will be backed by taxpayer money. In a statement on Sunday, the Fed said it “does not anticipate that it will be necessary to draw on these backstop funds.”

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The nuances did not matter to Mr. Biden’s critics. “Joe Biden is pretending this isn’t a bailout. It is,” Nikki Haley, the former ambassador to the United Nations now running for the Republican presidential nomination, said in a statement. “Now depositors at healthy banks are forced to subsidize Silicon Valley Bank’s mismanagement. When the Deposit Insurance Fund runs dry, all bank customers are on the hook. That’s a public bailout.”

Other conservatives argued that a government rescue, however it is formulated, warps private markets and eliminates disincentives for financial institutions taking reckless risks because they can assume they too will eventually be saved, a concept called “moral hazard.”

“Organizations that can’t manage risk should be allowed to fail, and taxpayers should not be forced to bailout the well-connected and wealthy because a bank prioritized woke causes above smart investing,” David M. McIntosh, a former Republican congressman from Indiana and president of the Club for Growth, a conservative advocacy organization, wrote on Twitter.

But the White House adamantly rejected the comparison to the bailouts of the past, noting that the government is protecting depositors, not investors, while firing bank managers responsible for the trouble. “This is very different than what we saw in 2008,” Karine Jean-Pierre, the White House press secretary, told reporters.

Michael Kikukawa, another White House spokesman, later said in a statement: “The president’s direction from the outset has been to respond in a way that protects hardworking Americans and small businesses, keeps our banking system strong and resilient, and ensures those responsible are held accountable. That’s exactly what his administration’s actions have done.”

Mr. Biden, for his part, blamed Mr. Trump for the current crisis, saying “the last administration rolled back some of these requirements” in the Dodd-Frank law that Mr. Obama signed in 2010. Mr. Trump signed legislation passed by lawmakers in both parties in 2018 freeing thousands of small and medium-sized banks from some of the strict rules in the earlier law.

The bailouts back then came in response to a banking crisis that seemed far more dangerous than what is currently evident. Some of the country’s most storied investment houses were collapsing in 2008 under the weight of risky mortgage-based securities, starting with Bear Stearns and later Lehman Brothers.

Mr. Bush was warned that a cascade of failures could propel the country into another Great Depression. “If we’re really looking at another Great Depression,” he told aides, “you can be damn sure I’m going to be Roosevelt, not Hoover.”

Casting aside his longstanding free-market philosophy, Mr. Bush asked Congress to authorize $700 billion for the Troubled Asset Relief Program, or TARP, to prop up the banks. Aghast at the request just weeks before an election, the House rejected the plan, led by Mr. Bush’s fellow Republicans, sending the Dow Jones industrial average down 777 points, the largest single-day point drop in history to that point. Alarmed by the reaction, the House soon reversed course and approved a barely revised version of the plan.

Mr. Obama and his running mate, Mr. Biden, both voted for the program and went on to win the election. Taking office in January 2009, they then inherited the bailout. In the end, about $443 billion of the $700 billion authorized was actually used to bolster banks, automakers and a giant insurance firm. As unpopular as it was, the injection of funds helped stabilize the economy.

The ultimate cost of the bailouts of that period remains in dispute. Mr. Obama and others who were involved often say that they were all ultimately paid back by the companies that benefited from the funds. ProPublica, the nonprofit investigative news organization, calculated in 2019 that after repayments the federal government actually made a profit of $109 billion.

But it depends on how you count the costs. Deborah J. Lucas, a professor at the Massachusetts Institute of Technology, calculated that same year that the TARP program cost $90 billion in the end, a far cry from the original $700 billion. But other bailouts, most notably to Fannie Mae and Freddie Mac, the federally backed home mortgage companies, brought the total cost of various bailouts to $498 billion in her estimation.

Either way, critics on the left and right felt aggrieved. As recently as 2020, Mr. Sanders cited the issue in running against Mr. Biden for the Democratic nomination. “Joe bailed out the crooks on Wall Street that nearly destroyed our economy 12 years ago,” he said at a town hall.

Mr. Biden stood by the decisions, maintaining they worked. “Had those banks all gone under, all those people Bernie says he cares about would be in deep trouble,” he said during a debate, adding, “This was about saving an economy, and it did save the economy.”

The issue was not enough to cost Mr. Biden the nomination, but that did not mean voters remember the bailouts of the past fondly. “To many, it didn’t feel like it ‘worked,’ and that made it very easy to demagogue,” said Mr. Buck. “A long period of economic malaise also leads to people looking for something or someone to blame, which is the basis for populism. I firmly believe we don’t get Trump without the devastation of 2008.”