Austan Goolsbee

So this question that comes up, that "Did we miss the opportunity when you guys had the power to leverage?," a lot of people will say, "Well, [Treasury Secretary Tim] Geithner's point of view was and the president's point of view was, you've got to save the system." But other people complain, "Yeah, but you also had the time to leverage the system in a way that you never will have again." Did we miss an opportunity?

I don't think we missed the opportunity. That was definitely on the minds and in the conversations that we were having at the time this was going on. But it was a really frightening moment. It is a lot of sleeping under your desk and eating dinners of Tic Tacs as this is going on. And you don't really know what's going to happen in the financial system, and you don't really know how bad is it going to get in the real economy.

I mean, the president takes office. We are losing 700,000, 800,000 jobs each month. Just the month of January 2009, that month alone was by many measures a pretty bad recession in previous times, just from that month if the month had been its own economy. I think for the critics who say we should have done more, we should have [had] more restrictions and we should have in the financially regulatory reform done even more, you can see why there's frustration.

But I do think you can't make light of the dangers. It wasn't just an experiment. It wasn't just an academic seminar where you could spout off a theory and say, "Oh, they should just do this," and then if it turns out it is wrong, you can just spout off a new theory. If we did the thing wrong, everything was going under, and that was a pretty stressful environment to be in.

But yet there's a view out in Main Street -- I know you did, but did the administration completely understand the anger of Main Street that the banks got their bailouts but Main Street didn't?

Look, not only did they understand it, the president was running in the campaign in the fall of 2008. The president is really upset about that subject. We're having discussions about the subject of how tough can we be? What conditions can we impose? We saved these guys' bacon, and for them to turn around and sort of flout the rules or say, "We don't want you to re-regulate us," or, "We don't want to have any special responsibilities," is outrageous, is unbelievable.

But the thing you've got to remember is, we're taking over. and much of the TARP [Troubled Asset Relief Program] money is already out the door. They already have that money. And so we're constantly fighting the battle of trying to impose conditions for the use of TARP money that they already got at the end of the last administration.

Now, if you look at the auto companies, I think here is an example where, in order to get money, they are forced to satisfy some really brutal conditions. They are forced through bankruptcy. They have to dramatically cut their costs. They fire a large group of the senior management of these companies, and they are able to turn that around. Those are the kind of conditions that we're in some sense always wanting to apply. And the two things that were constantly in tension with that were [that with] money that was already out, it's hard to attach the conditions to, and going so far that you blow up the financial system would bring about exactly the thing we are trying to avoid.

So I don't know that every single thing is always exactly striking the right balance, but I do know that that wasn't lost on people at the time.

Let's go back in history and then take it chronologically now. So 2007-2008, you're the chief economic adviser. When did you guys know that, lo and behold, we might be holding a bag of stuff we don't want to hold, coming up soon? What were you debating? What were you talking about? And how slowly did the conversation you were having get more and more serious about a possible crisis?

I would say there are about two different eras through the campaign. The first thing I'll note is way ahead of me, way ahead of any of the advisers or any of the people on Wall Street, then-candidate Obama was well, well ahead of the curve. He had sent letters to Secretary [of the Treasury Hank] Paulson and to [Chairman of the Federal Reserve Ben] Bernanke, asking them to look at subprime mortgages, that there could be a brewing crisis.

In the summer of 2007 and going into the fall, the president goes and gives a speech at NASDAQ in which he says: "Number one, Wall Street is not an island. If the middle class can't pay their mortgages, you may think that is not going to reach you, but I assure you it will. We're all in the same economy. I'm going to be for a middle-class agenda, and you shouldn't be against it. You should be for it. And number two, it doesn't make you anti-business or anti-market to be for stronger rules of the road and a sound regulatory financial system."

No two points were ever more worthy, and no two points were ever more central to a financial crisis than that. That was the fall of 2007. After Bear Stearns in March of 2008, we're in the middle of an epic primary campaign between [then-Sen. Hillary] Clinton and Obama. Obama goes and gives a speech with [former Fed chair] Paul Volcker sitting right in the front row at Cooper Union in which he goes through in great detail, "Here is how we should re-establish rules of the road and regulation of financial system."

It's March of 2008. In the audience are primarily political journalists who are all looking at each other and saying, "Why is he talking about Fed oversight?" It was not on the radar screen of the political system. But it was on the mind of the president, because everywhere he was going, this was the natural culmination of the public is losing trust in the financial system. And when you lose public trust in the financial system, what tends to happen is everyone pulls their money out. And that is the essence of what the financial crisis was.

So I would say the president was definitely concerned about the potential for crisis all throughout 2008 and demonstrated that [by] giving speeches on the subject. By the summer of 2008, in running up into Lehman, through Robert Wolf, [Obama adviser and president and COO of UBS Investment Bank], through some other connections of people that he was talking to as well as talking to the economists, people were on pins and needles, because we knew if the credit system collapses, the country could be in for a real bad recession.

And then, after the events of Lehman, the doors blew off. Then at that point, we knew we had had a series of midnight-to-3:00 a.m. phone calls throughout the summer comprised of a lot of major-league names in finance and economics. Paul Volcker, he didn't have a cell phone, and finally they demanded that he get a cell phone, because there were so many times we were trying to reach him at midnight or whatever time that he had to do that.

By the fall of 2008, Secretary Paulson and the administration are calling then-candidate Obama, and they are saying: "Look, we think the world is close to coming to an end, and we really need your support. What do you want to do?" Both of the candidates I think were thrown into positions that are normally reserved only for people that are already the president, where they are being pressed to publicly get up and say: "What are you going to do? What do you want us to do?"

I think it is to President Obama's credit. It wasn't a secret that the TARP, that the financial rescue or any of that stuff was unpopular. That was easily understood from the second it was getting announced. The question really was, despite that being tremendously unpopular, maybe the most unpopular thing the government has ever done, do we still have to do it? And there were certainly political people advising him: "No. Well, look, why can't we demonize this?" But the president said: "It's too dangerous. We can't do that."

One thing, going back -- so the Cooper Union speech and the NASDAQ speech, how is Wall Street viewing this guy? He's got Volcker standing behind him a lot of times. He's got lots of aggressive economists around him. What's their theory about this guy?

I found in many of these venues that Sen. Obama is giving a message, which is really kind of a tough-love message to Wall Street in which he is saying: "We're not singling you out for pain, but you've got to get your act together, and if there is no public trust, capital markets can't function. And when you rip up the rules of the road, you're going to lose public trust."

He is getting a lot of blowback from Wall Street as people say, "Well, this is anti-market," or, "Why do you need to be so tough?," especially as it starts getting a little rockier on Wall Street itself. The markets start getting more riled. We have the Bear Stearns incident, and people start saying: "Well, you can't say this stuff. You shouldn't get up and talk about this, because you might scare people away."

And that established this -- it's always one of the classic tensions, in moments like this, of how brutally honest are you going to be? And then the other side saying: "Wait! Wait! Don't be brutally honest. You are going to drive even more people away." I would say the reaction wasn't great from Wall Street. But to the president's credit, that didn't stop him from laying out what he thought was going to be necessary.

So take us to the Sept. 25, '08, meeting in the White House: Obama, [candidate Sen. John] McCain, the congressional leadership, President Bush. How do view that meeting? What are you hearing about that meeting? Are you there?

In the run-up to that meeting, we're getting ready for the first big debate, which was going to be in Mississippi, and so much of the entire policy team -- economics as well as the political team -- are in debate prep in Florida. And we're intensively -- we're going through, and the first debate was going to be about international issues, so we're going through international finance, international trade. It's in the context that the world seems to be blowing up. And in the midst of debate prep at a very nice -- we're near some beach somewhere in Central Florida, everyone in the room just stands up and walks to the corners and gets on their cell phones.

And I'm looking at one of the other policy people, and I'm like: "What in the world is going on? What has happened here?" And John McCain has just announced that he is suspending his campaign, and they're going to come back to Washington. Now everyone is in total confusion. We're here for debate prep, but is there not going to be debate?

So then they commence to getting ready for the meeting in Washington. Now, the thing that everyone on our side -- I shouldn't say that. The thing that everyone in the Obama campaign and in the Obama Senate office was quite confused about was, it seemed like McCain had a plan. He was saying, "Look, let's come back, and let's hash out the details." When they got there, it turns out nobody had thought anything about it. So it seemed like it was going off the seat of the pants. And the president goes to that meeting and knows quite a lot about it, has been talking to Paulson, has been talking to many of the figures as well as consulting with Warren Buffett and Paul Volcker and [former Treasury Secretary] Larry Summers and a host of other economic advisers.

So they go to this meeting. They reiterate some of the positions, and Sen. Obama says: "Well, look, what is your guys' plan? What are you proposing? What are we going to do?" And the main thing that came out of that meeting from my perspective was confusion on our part of, where is this going? Have they lined up the votes for the proposals? What became the TARP, they had the idea, but the Republicans themselves didn't have the votes for it. So they appeared to be asking Sen. Obama: "We want to do this. Our own people are going to oppose it. Can you get the votes to support it?" That was a very confusing moment, I thought.

What was it like to be in Washington in the midst of this crisis in the position that you guys were all in at this point?

So the financial crisis is absolutely full-blown, and at the beginning of December, the president has named all of the [people] who are going to be taking the economic jobs in the Cabinet. And they have the first big briefing in Chicago at the beginning of December. Everyone comes in, and we get a blizzard in Chicago. So most of the leading economic officials of the last two decades, they can't get a cab. They are all taking the El in and traipsing through the snow to get to the transition office.

They go through, and they brief the president, and absolutely one thing after another. It couldn't be worse -- epically horrible. The GDP we thought at that time is going to be shrinking 3, 4 percent a year at annual rates, which is extremely bad. Job market -- horrible. Financial markets -- Tim Geithner says that we can't argue that there won't be another collapse; we don't know that they will vote the second half of the TARP; the stock market may collapse further. [It's] not clear there won't be contagion.

I talk about the housing market. Prices are down. People can't finance their mortgages. Home wealth, household wealth has fallen the most on record, bigger than the beginning of the Great Depression. We go through one after another. The briefing ends. I go up to the president, who I've known for sometime, and I say, "Mr. President, that has got to be the worst background briefing that a president-elect has had since 1932, Franklin Roosevelt, if not Abraham Lincoln, 1861."

And he says: "Goolsbee, I hate to break it to you. That's not even my worst briefing this week." I took from that, no matter how bad it is, you don't want to be the guy sitting in the chair who is responsible for taking this thing over. When we get to Washington, it's a frightening time to be there. I mean, we're at the all-time peak of job loss, of the economy going down the tubes.

By now, the mistaken notion that this was just going to be a recession of the financial sector has become totally obvious. It's spread everywhere in the economy. Many of the biggest manufacturers are on the brink of collapse. Many of the big financial institutions may or may not be insolvent. We haven't had a stress test at that point. Nobody knows what their circumstances are. We're trying to draft what will become the Recovery Act because the private sector is in free fall. There is absolutely no sense in which you could just say, "OK, well, we will pass a tax credit, and let's just rely on the private sector to pull us out."

The private sector is -- they're battening down the hatches. And people don't know that there is going to be an economy in the next quarter, so the government is the only thing on the table at that point. That lent a certain level of intensity to most of the meetings that was not very comfortable at all.

I had never been to Washington before, and I used to tell the story from the '90s of when I flew on a flight from St. Louis to Chicago one time, and it was terribly turbulent -- drinks, ice getting thrown in the air and people gasping each time it jerks. And two rows ahead of me there was an older woman on the aisle and a young kid by the window, and the woman on the aisle kind of loses it and just begins screaming, and then we are in a particularly big jerk, [and she] says, "Oh, God, we're going to die," and keeps screaming, "We're going to die!"

As I say, people start saying: "When are they going to make an announcement that we are not going to die? Maybe we are going to die." And we come in, boom, flight lands, and everyone gets off. And I say to the kid, who was just looking out the window the whole time, I said, "Man, that was some flight." And he says: "That was my first time on an airplane. Is it always like this?"

And as bad as I felt for the kid, at that time, I realize in January 2009, I'm that kid. I'm asking everybody, "Is this normal?" "No, we normally don't have to decide things like" -- you know, in the Situation Room they will have meetings, and somebody will put the title of the meeting. Or they'll send around: "Here, what will the titles of the meeting be? 'Government's Role as Majority Shareholder of Major Corporations in the United States.'" Wait! What? You know, we're dealing with problems that nobody should have to confront.

And in the economics profession, people would always tell each other there could never be another Great Depression because we understand economics now, and so if that happened again, we would prevent it. Nobody ever really thought we would have to show our cards and do you really know how to prevent it. We get to January 2009, and now the economics profession are calling in and saying: "You know what? We're really about to go into the Great Depression, and what are you guys going to do to prevent that?"

The Dec. 16 meeting which you were talking about was also the point where the stimulus was discussed. Take us into that debate on how high the number could be, what the political considerations were, how the decision was made to arrive at the level.

Certainly the overwhelming feeling of people, when debating this, is there is only going to be one chance to get this right, or at the very least, if you mess it up, we might spiral into the Depression. So we've got to come at this with a huge amount of force. What's the most that the system can bear? Through the fall, the biggest number that anybody had been talking about was $175 billion. And even going into the beginning of the administration, the biggest number people were talking about was in the $300 billion type of range.

At this December meeting, given how big the GDP losses were going to be, Christy Romer, [Goolsbee's predecessor as chair of the Council of Economic Advisers, 2009-2010], says: "We're going to need $800 billion of stimulus. That will be the biggest stimulus ever in American history, bigger than the New Deal; as a share of the economy, the biggest ever."

I was looking at Rahm Emanuel, [White House Chief of Staff, 2009-2010], when she said that, and he had a pained look on his face. And I don't know if it was contemplating how hard it was going to be to get something through Congress, if it was, "Eesh, where is the economy?," or what, but there was a certain sobriety over the task that was going to be at hand.

Much of the discussion was about things like, could it be one big thing? And the answer is, probably not, because there wasn't any one thing that could be done in a rapid enough time frame that it would help prevent a depression.

As to the question of should it have been larger, here I think the critics have been a little unfair on two grounds. The first is, it was the biggest recovery act stimulus ever, of all times. It came down to one vote, and the people who were on the margin were saying: "It has to be smaller. You can't spend as much. You have to replace these forms of spending with these tax cuts." So the argument that it should have been something substantially bigger, I think it's pretty clear it couldn't pass Congress.

But number two, in many of these areas, the direct forms of stimulus of government spending, we're spending five times, 10 times whatever's been spent. So trying to get that through the pipe in a short time frame was not that realistic.

So what about multiyear? [Economist Joseph] Stiglitz told us it should have been a multiyear thing.

So in the data, the average recession lasts 11 months. Stimulus itself is normally quite controversial, because the typical stimulus takes 18 months to pass and get out the door. And so by the time it is getting out the door, the recession is already over, so it becomes inflationary.

So there was a lot of discussion of how long should we be doing this. And the view was, let's take some of each. So there were some geared for one year, some for two years and some for three years, a 10-year infrastructure program. Truth be told, the president was always for enhancing infrastructure as a business development tool, and most of the economic team totally favored that.

But a 10-year infrastructure program not paid for is not really stimulus because it is not going to be spent until 2016. So again, I think it is a little unfair to portray it that way.

Let's talk about the team. We skipped over that, how the team was chosen. Tim Geithner gets the secretary's job. Why? Why Tim Geithner?

I don't totally know the answer to that.

Maybe you can help us, though, about the way Obama viewed him, how they were simpatico. Is there something going on there?

I don't know. That was -- I wish I could, but I wasn't involved in the personnel decision. That was kind of [Obama-Biden Transition Team Chair John] Podesta and those guys. The campaign people weren't really on the transition stuff.

But why not Volcker? It surprised some of the earlier people that were around.

Look. My goal in life was to be 80 percent Paul Volcker and 20 percent Muhammad Ali. Paul Volcker is my hero, and the guy is amazing, and nobody has more public credibility than him. So I wasn't involved in those decisions. But Volcker is amazing. His advice was amazing. We listened to everything he said. And I wish he'd keep talking more, and we should listen to that. Through the campaign he was more than a voice of reason. He was really quite grounding, because he's seen it all.

And that mind-set that capital markets are good but you can't trust banks any more than you can trust anybody else, you know, you've got to keep an eye, if you're the regulator, you've got to keep an eye on what -- everybody will try to take advantage for their own benefit, so you've got to have strong rules of the road, and you've got to have strong regulators, I think the worldview was proven right by this crisis.

It's been reported that you almost didn't take the job, and you had a conversation with the president saying whether it was possible or not to make a difference with "the same old Clinton mafia dominating the upper reaches of policy-making." What was that conversation all about?

Not exactly. I don't want to --

Tell us the truth of it then.

No. The tension the president was always going to have if you are coming into an environment like the one we came in is, we're not going to be able to come in and have great luxury of learning on the job and trying to figure it out. I think the president's view was, "I've got to have some people who can come in and are going to know what they are doing right away because it is such a dangerous moment." And the thing is, if you look, if you go measure an administration by what they were able to accomplish, it strikes me the administration accomplished a great deal right out of the gate, and we did prevent a depression.

Now, that doesn't make 1.5, 2 percent growth and a damaged job market and a damaged real economy any more fun. It's not fun. We've got a long way to go to get out of the hole we're in. But I do think when historians look back, the fact that we did not have a depression and we returned to growth was pretty notable, because the shock that sent us into this recession was bigger and more negative than the one in 1929 that started us into the original Depression. And I kind of think the president's appointments -- and that was his worldview.

What was your role in the whole debate? It seems that you were a little bit more reform-minded. You were more interested in -- for instance, the tax on big banks was a debate that took place. Take us a little bit into that debate and why you thought that was necessary and why we didn't go in that direction.

Well, we did propose a tax on the big banks. It didn't pass. But, you know, look -- in the heart of my University of Chicago soul, you are required as a card-carrying member of the Chicago School to oppose corporate welfare in all its forms. And I could understand that we've got to save the financial system from collapse, but that doesn't mean we need to be happy about it, and that doesn't mean we need to pretend like it didn't happen after we've dodged the bullet.

I think the president was probably the most annoyed in the moment after the rescue when the U.S. government has guaranteed the liabilities of all the major financial players to prevent a collapse. Because it guaranteed their liabilities, the spread between what they can borrow at and what they are lending at is the biggest it's ever been, and that returns them to profitability. And based on their profitability, they begin paying themselves big bonuses and saying: "Look at how profitable we are. We deserve these bonuses."

So in one meeting in the Oval Office I said: "Look, Mr. President, let me get this straight. We guaranteed their liabilities, which is what made them profitable, and now their bonuses are going to go back to the levels they were before the crisis when they had this profitability." And I said: "The thing is, a lot of these guys are wanting to be paid like rock stars. They are just lip-synching music that the government is playing for them. That doesn't make you Mick Jagger. That makes you Milli Vanilli. And even Milli Vanilli had to give back the Grammy. I think this is worth paying attention to."

The March 15 meeting, where the position --

The 15th , '09.

'09. Dealing with the banks. So that's where the stress test [was] sort of talked about. There has also been a lot of contention about -- and you can hopefully clear that up for us -- the contention about how serious it was to deal with the banks, to possibly take Citigroup and sort of restructure it. What happened in that?

Some of these I know. There were many different meetings, and I wasn't in all the meetings. The markets are still in terrible shape. There is a widespread view that perhaps a majority of the big banks are insolvent, that their assets are smaller than their liabilities. And there's high risk of bank runs and financial collapse if that's the circumstance.

So the debate is really between three camps and centers after we've decided, look, we are going to do a stress test. We're going to open up the books to the world so people can see what is the circumstance of the capital position of these companies.

And the question being actively discussed and debated is, what do we do when somebody fails the stress test? If they fail it wildly, fail the stress test, should they be nationalized? Should they be broken up into pieces and sold off? Should they be directly recapitalized? There's a lot to be said on each of those points. In my experience, the discussion was about what will we do when the stress test is done if somebody fails. It wasn't "Let's go pre-emptively decide one of those three and break them up before we actually have the data of whether they've failed."

When we get the stress test results, the country's good fortune was that the banks' positions were not as negative as everyone thought. So they looked and said, OK, you could argue, well, they should have made the stress level in the stress test even more difficult. But the stress test was clear enough that people could go out on their own and look and say, OK, fine. I'm going to in my own mind say what if the unemployment rate gets to 15 percent and what if the GDP goes down another 10 percent? What will happen to their capital position? And it wasn't as bad as they feared.

And giving the disclosure and showing people what their circumstance was and committing to recapitalize the banks is what allowed the private money to come in. And it actually ends up succeeding at rebuilding the system. You don't know what the counterfactual is.

I do think there is a group of people who say we should have just nationalized all the banks. I think to that there are two things to think about. One is, there is still a great chance that the financial rescue would have had ultimately a gigantic cost the way it had in virtually every other country of the world that's had a big financial crisis.

And that point was raised in the meeting?

That point was raised all the time. We're trying to think through, what will the cost of these things be? So if you nationalize the banks and it drives out all the people or if you don't manage them successfully, the cost of that -- you will essentially lose all the money, and that would be in the trillions.

I mean, the average cost to a country from a financial rescue was usually 5 to 10 percent of GDP. So in the TARP terms, it would be as if we did a TARP that cost $2 trillion of money up front and we lost $1 trillion of it. That wouldn't be out of the ordinary at all. That would be kind of the median experience of other countries.

So it was too expensive an idea, basically.

I would say the idea was risky. So we're trying to think through as we are going along what will be the outcome. The other thing to think about with explicit nationalization is that initial set up of the TARP had limited restrictions on dividends, executive compensation. If you went and announced, "We're about to wipe you out," you might very well have seen a lot of these companies just pay out everything they had to their shareholders to avoid it being taken away.

Clarify, because this is a contentious thing, and I think you are in a great position to clarify it. The [Ron] Suskind book [Confidence Men] raised it, which was that the way that the story is defined is that there was a decision made to do two things. The stress would be running at the same time as looking at one bank because that was less expensive, and that is something that could be done. Citigroup was the one because they were such a basket case. And the story is -- and then just knock it down or whatever. Tell us what the reality is, that what happened was that was the agreement, but that Geithner slow-walked the bank --

I know that was his allegation.

So what's --

In all the discussions I saw of the financial rescue, the nationalization versus breakup and sale versus recapitalize, there was active debate among a lot of people of which of those is more sensible. But my experience was all of those were about what are we going to do once the stress test is done and someone has failed badly, which we presumed Citi and maybe others would do.

But the issue of trying to break up a bank before you had the stress test results is that you could lead to another run on all banks in which they look and said: "Well, wait a minute! They are not even waiting to see how big the losses are. Therefore, let's get our money out of all the banks." That fear of contagion, it was a very real possibility. And that's why the story that the president ordered them to be broken up and Tim Geithner just said no and just didn't do it, I don't think that that is accurate. I think that is absolutely not accurate.

The other side of some people who disagree with what happened is like Professor Stiglitz, where he basically says the stress tests were basically to raise confidence, but in fact they weren't harsh enough, and he states that the same tests were run on the Irish banks, and they passed and then eventually went belly up.

But the relevance of the stress test was not "Do you pass?" It wasn't a pass-fail exam. The relevance of the stress test and what made it work was that it opened up the books and gave enough detail that investors could look for themselves. And you could do whatever level of stress you wanted. If you want the stress to be higher and you thought that there would be another depression and could they survive that, you could do it.

And the market looked and said, as bad as the position of these banks, it is not as bad as I thought it was. And so once they could see that it wasn't as bad as they thought, it facilitated people to say: "Well, you know what? I could actually make money. I'm going to invest in these banks."

And that was Geithner's idea, right? That was his theory? That was his program?

Yes.

Did he define that in the meeting? Is that where it first came up?

That's what I'm trying to think in my mind. I don't remember it being all about one ultimate meeting. There was a progression. You don't know what is going to happen with the markets, and we didn't know what was going to happen with the stress test. Would it be the case that the banks were better than the circumstance? So there was a lot of uncertainty over which of these is going to be the least expensive way to save the financial system so that we don't -- it's totally obvious from the beginning that the American people cannot stand the idea that U.S. taxpayers have had to bail out financial institutions. It's completely offensive. You can see why people are furious.

So I think to do something, if there is a decent chance you are going to lose hundreds of billions or even trillions of dollars, you've got to really have thought this through before you do that.

So in this, we did the stress test. We were preparing plans of, OK, we're going to do the stress test. When it comes back and some of these banks are in terrible positions, then what are we going to do? But in some sense we don't really get to that situation, because after the stress test, it is not as bad as they thought. So nobody wildly fails the stress test, and it becomes that much easier for them to raise their own capital and they pay back the money.

So it was a success.

In that sense it was a success. I believe that it is by far the least expensive financial rescue in world history. Now, that said, we saved these guys' bacon at a moment of great crisis. We gave them a precious, precious insurance policy, where the U.S. government through the FDIC [Federal Deposit Insurance Corp.], the Fed and others guaranteed their liabilities to save their lives, and the reason we did that was because we didn't want the economy to collapse. It wasn't because they're our heroes or we wanted to be their friends or anything of the sort.

So to be saved in that kind of environment, and then to turn around and say, "We're going to invest hundreds of millions of dollars in lobbying to block any regulations," is almost unbelievable. I mean, I don't know how you get out of that box, but that's the democratic process, so they have every right to do it. It's just, you just can't believe that that is what it came to.

So in some ways, is the White House holding its nose as it is basically saving the asses of these guys?

Yeah, 100 percent the White House is holding its nose as it's trying to save these guys' bacon. And I think that was true from the previous administration as well, though I do wish that they had tougher conditions put on the people who got the money when they first did it. I think, to their credit, both the previous administration and the Obama administration are trying to do only that which is necessary to prevent a collapse, and they are absolutely not trying to aggrandize these guys.

Your expert opinion as an economist as well as someone who saw it firsthand was that there was little alternative, that basically the path taken was what?

I think, number one, we, the Obama administration, attempted to put in as many tough conditions as we could, conditional on the view you can't put in so much that the whole thing still is going to fall apart, that people are going to try everything they can not to take part and take a risk that the system breaks down, because then the economy would be even worse. But that said, all pressures, in my view, we needed to and continue to need to put as much pressure to hold people accountable for the losses as we can.

So when this comes to a head in my mind is when the AIG guys, the very group that blew up and threatened to destroy the entire financial system, comes back and gets a bonus. And they hold up the firm, and they say, "Well, we're the only ones that know how to keep this from blowing up, so you give us our bonuses, or else we will blow up the world." And at that point somebody asked me, on the news, "Do you think they deserve a performance bonus?," and my answer was: "These guys deserve the Nobel Prize for evil. They don't deserve a bonus."

And they got back and they said, "You know, that was an overstatement." And yes, it was probably an overstatement. They at least deserved a nomination for the Nobel Prize for evil. And that, we're just dealing with that all the way around. It's not accurate and it's not fair to say that the administration just handed out money, didn't impose conditions and didn't think about it. That's not accurate. That's not true.

The housing market and how to deal with it was always key at the center of this. What are your thoughts now, looking back, at the problems in dealing with that?

Well, the housing market is and was a terrible morass, where we've got 5, 6 million vacant homes, construction completely dormant because we had a huge bubble and we got way overbuilt and we got way excess debt and people in over their head. It was a $25 trillion market that fell down to a $20 trillion market. Once you start thinking of numbers that big, you realize the government is not in control of this market. The government can't set a price floor on this market. ...

So the Congress in, I think, '07 passes the HOPE for Homeowners Act. And it's supposed to help maybe 500,000 people, and it helps less than 500 people. And a series of government policies, before the Obama administration come in and very few people use them -- we then come up with a policy that, if you had told me at the time you'll get close to 2 million people helped, I would have thought that was pretty good.

If we made a mistake, it was in saying that it might help up to 6 million people, because then when you look back you say, "Well, it's only 2 million" -- and the one thing that we just didn't -- it didn't cross our minds was the -- we came up with a plan to modify people's mortgages, people who were paying, and if you could get it affordable, would allow them to have lower payments.

The banks got onboard with that idea. It never crossed our mind that the same bank that was agreeing to modify the person's payment -- let's say cut their monthly payment by a third -- that a different side of the same bank was going to turn and say: "Well, you only paid two-thirds of your monthly payment. Therefore we are going to launch a foreclosure against you." That is a so-called dual-tracking problem. And I don't know if it was because of lack of oversight and controls within these banks or what was going on, but that proved to be extremely detrimental. And we are still trying to figure out why did that happen. I think the banks are still trying to figure out why did that happen.

But it's certainly an area that was not a success.

Look, on this it depends how you measure it. As many as 2 million people got substantial reductions in their monthly payments, and that's probably by a factor of 1,000 more than participated in any government housing program. And the launching of that program helped to get a lot of people private modifications.

Second, if the government had not stepped in outside just that narrow mortgage program, if the government had not stepped in through Fannie [Mae] and Freddie [Mac], through other parts of their credit market to sustain the mortgage market, I believe that you would have seen for housing finance the same thing you saw for consumer finance all over the map. Auto loans totally dry up. Credit card loans dry up, lines of credit for small business getting pulled, yanked, people going bankrupt. I believe that you would have had 50, 75 percent of this country unable to get any mortgage whatsoever. We would have potentially had much more devastating impacts on the housing market.

Now, that said, we still have a huge negative equity problem in the country. We still have a $20 trillion market that lost $5 trillion of its value. We have a lot of households whose balance sheets got wrecked because their number one asset went down so far in value, and what do you do about that? It's really not easy to answer that question of what can the government do to solve that. And that is a problem that we continue to struggle with, and we probably will for sometime.

What was your overview of what Dodd-Frank [Wall Street Reform and Consumer Protection Act] became? Is it too weak? Does it do enough? It still doesn't break up "too big to fail" banks.

Look, yes and no. I think Dodd-Frank does a lot of things good that needed to be done. Now, on addressing "too big to fail," no phrase is more misleading than "too big to fail," because it wasn't about big. If you took the biggest banks in America, if you took Bank of America and you said, "We are going to just break them up to make them smaller," you could break them into six pieces, and every one of those pieces would be bigger than Bear Stearns was.

That wasn't the problem. It wasn't just the size of people that made them dangerous. It was how connected they were and how much fear of contagion was there. So if they went down, would they take down their neighbors? Dodd-Frank does a lot of things to try to limit the ability of one bank to blow up its neighbors and thereby to take a bunch of people hostage when they get in trouble. And that part is very important.

Now, like all legislation, there's a whole bunch of other stuff in there, too. And I'm sure people will go back and argue about a lot of other things for years to come. But the idea that we ought to stick with the status quo, that got us into the worst financial crisis ever is almost criminally insane.

Where are we now, and what do you think the legacy of the way you guys and President Obama dealt with the crisis is going to be?

I think history will look back and say, that was an insightful way to do it. I think history will look back and people will still be mad 50 years from now [about] how did we come up with this insurance policy. And yeah, we're happy they paid back the money. But how was there not more remorse and accountability? And we should have had tougher conditions to get the money, like ended up happening with the auto companies or others.

And we will live to see whether we learn the lesson of Paul Volcker that no matter who, no matter what industry it is, you can't just trust people to police themselves. We've got to establish rules of the road. We've got to enforce those rules of the road, and that's good for business. That's not just good regulation; that's good for the market itself. It deeply undermines public trust in our financial markets if people can't trust the balance sheet or they don't know what is going on.

And at the peak of the crisis, the highest interest rates were the banks lending to each other. No bank would lend to the other bank because they said, "Well, they probably look about like us, and we're doing everything we can not to show what our problems are." We will see whether we learn that lesson. If we don't, then 10, 15 years from now, we will again be subject to similar kinds of speculative bubbles, excess credit and potential crises. And let us hope that we have learned some important lessons of both how to prevent it and how do you stop it when that occurs.