Santorum and Romney Were Wrong on the Bailouts -- But George W. Bush Wasn't

When campaigning in Michigan recently, GOP presidential hopeful Rick Santorum criticized President George W. Bush, a fellow Republican, for supporting the bailout of ailing banks and auto companies during the recent financial crisis. “President Bush set a precedent,” Santorum complained, “and it was the wrong precedent.” Mitt Romney agreed with Santorum’s criticism of federal loans to auto companies, but he disagreed on the question of aid for Wall Street. Romney supported President Bush’s efforts to rescue large banks.

Many decisions by President George W. Bush deserve criticism (take your pick: a questionable rationale for war in Iraq, tax cuts for the rich that turned federal surpluses into deficits, or policies promoting de-regulation that allowed reckless speculation). But George W. Bush’s stance on bailouts is not one of those major shortcomings. By endorsing strong federal intervention in an emergency, President Bush helped to prevent the U.S. economy from going over a cliff.

During the fall of 2008, when several corporations were close to bankruptcy and another Great Depression seemed possible, Bush responded energetically. Rather than let markets work out a slow and painful adjustment to the meltdown, like several legislators from his party wanted to do, the president backed a Washington-based rescue. His decision constituted an extraordinary policy reversal, since Bush had long favored a hands-off, laissez-faire approach to economic problems.

The worst period of the crash occurred in September and October of 2008. Wall Street’s problems turned acute when Lehman Brothers, a huge investment bank, collapsed. A meltdown quickly developed. Merrill-Lynch went into in a free-fall and other venerable Wall Street firms, such as Morgan Stanley and Goldman Sachs, looked shaky. AIG, the country’s largest insurance firm, fell into serious difficulties. General Motors and Chrysler were close to bankruptcy. The wheels of the U.S. economy seemed to be coming loose.

During that emergency, President Bush and key members of his administration supported TARP, the Troubled Assets Relief Program. TARP created a huge pool of funds—$700 billion—to prop up teetering corporations and encourage banking officials to begin lending again.

Bush’s Treasury Secretary, Henry Paulson, Jr., later defended TARP and other federal programs designed to combat the crisis. If strong action had not been taken, Paulson judged, there would have been a “chain reaction,” precipitating a depression “worse than the 1930s.”

Many Republicans and some Democrats in the U.S. Congress were not responsive to Bush’s and Paulson’s requests for a quick and substantial rescue operation. They opposed TARP. Speaking like radical champions of limited government, those legislators insisted that markets should create solutions to the problems, not government.

President Bush rejected that recommendation. He pleaded with members of Congress to support TARP. “If money isn’t loosened up, this sucker could go down,” the President warned. He told the American people, “Our entire economy is in danger.” Later, when two of the nation’s auto manufacturers seemed headed for bankruptcy, Bush disagreed vehemently with members of his party who preferred to let the companies fail (Republicans talked about prospects for “managed” bankruptcy, leading to reorganization). Some GOP legislators claimed federal loans to General Motors and Chrysler would lead to socialism. Bush disagreed, arguing that “government intervention is not a government takeover.”

George W. Bush accurately characterized the temporary character of Washington’s rescue operations. He explained that federal intervention did not aim to achieve permanent governmental dominance of the country’s auto industry. “Its purpose is not to weaken the free market. It is to preserve the free market,” Bush noted correctly.

Politicians who disagreed with the president expressed concern about “moral hazard.” If corporate leaders made risky and foolish decisions, their companies should be allowed to close, they argued. Bailing out failing businesses during hard times only encouraged more reckless behavior from business leaders in the future.

In one of the finest books on the crash, Crisis Economics: A Crash Course in the Future of Finance, Nouriel Roubini and Stephen Mihm acknowledge that moral hazard is a legitimate problem, but they defend the bailouts. Holding the line on non-intervention in the midst of a crisis “can inflict tremendous collateral damage,” Roubini and Mihm stress. If “the resulting conflagration devours the entire financial system, never mind destroys the lives of ordinary workers around the world, the lesson [about moral hazard ]tends to be lost in the mayhem.” Some bailouts were not warranted, they acknowledge, but “the back-stopping of the financial system prevented the Great Recession from turning into another Great Depression at a time when private demand was in a free fall.” Federal action was necessary.

Journalists and historians have raised many questions about President George W. Bush’s domestic and foreign policies. They have found plenty to criticize. But it is worthwhile remembering that Bush adjusted his political style late in his second term. During his last year in office, Bush paid less attention to advice from Vice President Dick Cheney and his fellow neoconservatives.

Perhaps most important, Bush responded courageously and effectively to the financial crisis. He did not remain inflexibly committed to the small-government creed he had espoused for years. Instead, Bush endorsed a robust federal response to the crisis. By mobilizing the authority and prestige of the White House in support of Washington’s intervention, Bush helped to save the U.S. and global economies during a particularly dangerous moment in recent history.

With the advantage of hindsight, we can see that President Bush took a wise stand on the bailouts.

He was correct in stating that large banks had to be saved. If they had collapsed, the entire financial system could have tumbled, bringing misery to millions of people in the United States and around the world.

Bush was correct—and Romney and Santorum were wrong—on the matter of federal aid to GM and Chrysler. During the crash, it would have been extremely difficult for auto firms to raise billions of dollars in emergency funding from private banks and other lending institutions. The nation’s major financial companies were in a crisis. They could not pump billions into troubled auto businesses. “Managed bankruptcy” was not a workable solution during those dark days.

Let’s raise at least one cheer for George W. Bush. In this instance historians can look favorably upon his leadership.