A decade now after the 2008 financial crisis, the cultural and psychological imprint that it left looks almost as deep as the one that followed the Great Depression. Its legacy includes a new radical politics on both the left and the right; epidemics of opioid abuse, suicides, and low birthrates; and widespread resentment, racial and gendered and otherwise, by those who felt especially left behind. This week, New York continues our retrospective on the crash and its aftermath by publishing interviews with some of those who were closest to the events. Here, Sheila Bair, head of the Federal Deposit Insurance Corporation from 2006 to 2011, speaks about why Citigroup should have been broken up and the structural and political reasons banks remain too big to fail.
From New York Magazine:
How bad was the crash, historically speaking?
Pretty bad because it hit the Main Street level. There’s kind of the first wave of people who had these unaffordable mortgages and were getting hit by falling home prices and couldn’t refinance, so we were seeing the foreclosures pick up. When that started hitting consumer spending, and the banks had to pull back on credit because they didn’t have enough capital, then you saw people who had nice, safe mortgages who were losing their jobs because of the broader economic situation.
Are there other market crashes that you could say hit Main Street?
You’d have to go back to the Depression.
If you could change one thing about how it was dealt with from the policy side, what would it be?
That’s a hard one.
You said once that the government should have let Bear Stearns collapse!
Yeah [laughs]. I think there was the expectation that there were going to be bailouts, which was not good. I think once the system was stabilized in early 2009, we had an opportunity to restructure and break up Citigroup in particular, but we didn’t do that. But even more so than that —
Hold on, what would you have done with Citigroup?
We should have taken steps to restructure and downsize it. There’s been a lot written on that, but I think that was a missed opportunity. We just reinforced too-big-to-fail with all these bailouts. Other than Lehman Brothers, nobody took their medicine. Restructuring Citigroup would have sent a signal; it would have imposed greater market discipline. We should have at least subordinated debt holders and made them take some haircuts and convert their positions in equity: truly force them to shed bad assets, clean up their balance sheet, make them smaller, make them more efficient. You would have had a better bank, and you would have had some market discipline. You would have sent a powerful signal that the government had the gumption and courage to stand up to these very large institutions.
But that’s not what I think is the biggest mistake: We didn’t provide enough widespread relief to homeowners who were underwater. All these mortgages should have been written down to appraisal value. Along with some equity sharing with the lender for any home-price appreciation, it would have given people who were locked in their homes a way to sell them, to move, or to at least rehabilitate the mortgage with more affordable payments.
There’s this great book called House of Debt that argues the real driver of this deep recession was not the banks pulling back on credit; it was the drawback on consumer spending. Our economy is dependent on consumer spending, and home equity had been driving that. Once the equity was gone, the consumer spending was gone. We had a situation where people were still struggling to pay their mortgages — they had these unaffordable payments — and they weren’t spending anything else. So I think in retrospect, we should have done that, a widespread write-down of principal. We needed something simple and radical and we just never did it.
How successful do you think the reform efforts were?
We’ve improved the system on the margin. There are higher capital requirements, better bank liquidity, less reliance on short-term financing, less reliance on debt among the regulated banks. Those are all positive things. But the financial system we have is basically the financial system we had in 2008, with more capital and less reliance on short-term funding, so whether it’s enough? I hope it is, but it’s still basically the same system. The political world wasn’t there in Dodd-Frank to break up the banks or do anything that would have fundamentally changed the system, so it’s still what it is. Let’s just hope it’s enough…