The approach of the Bush and Obama administrations stands in stark contrast both to the policy followed by the British government, and to earlier examples of successful financial bailouts in the United States.
In Great Britain, led by then-Prime Minister Gordon Brown, undercapitalized banks were told to raise additional capital. They were given the opportunity to go to the market themselves, but they were warned that the UK Treasury would inject funds into them if they failed to do so. The Royal Bank of Scotland and Lloyds TSB did require government support. The equity injections were accompanied by restrictions on executive pay and dividends. In contrast to Paulson’s method of injecting funds, banks were not stigmatized if they could borrow from the markets.
Similarly, during the Great Depression of the 1930s, the US took ownership and recapitalized banks via the Reconstruction Finance Corporation (RFC) and managed mortgage restructuring through the Home Owners’ Loan Corporation (HOLC).
No doubt the Obama administration helped to alleviate the crisis by reassuring the public and downplaying the depth of the problems, but there was a heavy political price to pay. The administration’s policies failed to deal with the underlying problems, and by protecting the banks rather than mortgage holders, they exacerbated the gap between America’s haves and have-nots.
The electorate blamed the Obama administration and the Democratic Congress for the results. The Tea Party was formed in early 2009 with large-scale financial support from the billionaire Koch brothers, Charles and David. In January 2010, Massachusetts held a special election for the late Ted Kennedy’s Senate seat, just after Wall Street paid extravagant bonuses, and elected the Republican Scott Brown. The Republicans subsequently took control of the House of Representatives in the 2010 midterm elections, gained control of the Senate in 2014, and nominated Donald Trump, who was elected in 2016.
It is essential that the Democratic party recognize and correct its past mistakes. The 2018 midterm elections, which will set the stage for the 2020 presidential election, is an excellent opportunity to do so. The political and economic problems that confront the country are much deeper today than they were ten years ago, and the public knows it.
The Democrats must recognize these problems, not downplay them. This year’s midterm elections will be a plebiscite on Trump, but the Democratic presidential candidate in 2020 must have a program that many Americans find inspiring. The electorate has seen where the Republicans’ demagogic populism leads, and a majority should reject it in 2018.
Rob Johnson is president of the Institute for New Economic Thinking and a senior fellow and director of the Global Finance Project for the Franklin and Eleanor Roosevelt Institute.
George Soros is chairman of Soros Fund Management and chairman of the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of many books, including "The Alchemy of Finance, The New Paradigm for Financial Markets: The Credit Crisis of 2008" and "What it Means, and The Tragedy of the European Union."