Christina Romer was chairwoman of President Obama’s Council of Economic Advisers from 2009-10. In January 2009, Romer projected that the $787 billion stimulus package would curb unemployment at 8 percent. (It has remained above 8 percent since February 2009.) In this interview, she laments that she and other top advisers underestimated the extent of economic damage caused by the crisis. This is the edited transcript of an interview conducted by producer Jim Gilmore on Jan. 4, 2012.
So let's start, Professor Romer, when the 2007-2008 election campaign is taking place. You're very interested in some of the stuff that Sen. Obama, candidate at that point, is saying. What were your expectations? And why did you very much want to be involved?
I think, like many people, my first introduction to him had been his 2004 speech at the [Democratic National] Convention. And that certainly got my attention, and I said, boy, this guy has something. But I often say I actually, I fell in love with his website; that actually, if you looked at the original campaign website, certainly the economic policy was really awesomely good.
So everything from what he was proposing on energy to health care to education to all of those things, they were good economics. They were based on evidence; they were not doing the easy thing or the politically easy thing; that they were nuanced; they were smart. And that was where I first started to take notice, that I really like what this guy believes in. But I also like the way he thinks and the way he evaluates things, the way he approaches policy.
So that's really what made me incredibly enthusiastic.
This was a time when, of course, the reverberations were being felt about coming problems. Housing was going down the drain, and there were lots of problems that everybody understood were coming in one way or another. How did you see him as being able to play a role, someone that would be able to change things in a way that you thought would be much more positive than what was happening?
Yeah. I think you need to be careful. Having been through what we've been through it's easy to say, "Oh, we all knew what was coming our way." And we really didn't. I mean, there were certainly troubles -- we'd seen the big boom in house prices. We'd seen some uneasiness there in the fall of 2007, when we started to have the subprime crisis.
But in truth, for much of that period, the bigger issues seemed to be longer-run. If you think about it, candidate Obama, Sen. Obama was running on sort of long-run economic issues, like restoring prosperity to the middle class, dealing with the perennial problem of health care in the United States. He talked a lot about the budget deficit, about the need to transition to clean energy. Those are not dealing with an immediate crisis. They were about our long-run economic security and strength.
But it was -- I think where you really started to see his ability to deal with what's going to turn out to be the crisis was more during, actually, the actual campaign. So the primary's over. It's the fall of 2008. And I think we probably all remember maybe it was the first debate with [candidate Sen. John] McCain [R-Ariz.], where there was this on again/off again. It was shortly after the collapse of Lehman [Brothers], and the whole question of "Maybe we shouldn't be debating; we should be going and getting into Congress or something."
And I remember, I think it was Sen. Obama who said, "Really, a president has to be able to do many things at once, and we can debate and also get back to Washington and vote on anything that needs to be voted on." He obviously seemed like a cool head in the middle of a crisis and was already seeming like someone who could handle anything that was going to come our way.
Let's move up in time a little bit to the Dec. 16 meeting, where you're all in Chicago. How at that meeting does it become quite clear to everyone that, my God, how much of a problem we basically had just gotten dumped in our laps?
Well, of course the Dec. 16 meeting comes after the economics team has been in place probably for a good three or four weeks. So one of the ways, again, that I think the president-elect conveyed how serious this was, the first thing he did was appoint a secretary of the treasury, and then the rest of the economics team.
So we were all in Washington right after Thanksgiving, and had spent a number of weeks in kind of frenzied activity, figuring out what's going on, what do we need to do in terms of fiscal stimulus, a housing plan, a financial stability plan, all of that. There's just meetings every day, working 14 hours a day. And for us, in some sense, that Dec. 16 meeting was kind of a bringing together of our thought process, that we wrote a 50-page memo that we sent off to the president-elect the night before. And then we all traveled to Chicago to talk with him.
So it's not as though there were lots of surprises at the meeting from our side. It was really a chance for us to hear what he's thinking and for us to tell him what we were thinking. And definitely a message of that meeting is, "This thing is terrible."
And I remember I, sort of, was at the beginning at kind of showing: "Here's where most of the forecasts are. Here's where we think we're headed." But I remember saying, "Let me tell you the two things that worry me, kind of the two worst case scenarios." One was, we have another round. The financial crisis was kind of quiet at that point. We'd been through Lehman, we'd been through the fall, but still we were still shaky; that that could erupt again to another major credit freeze, and we could really be heading into a terrible Great Depression-like downturn.
But then the other bad scenario that I tried to convey was, the other was a lost decade. We come out of this, but we're like Japan, and we just barely grow year after year. And that's also devastating to an economy.
So that was trying to hit him with both the point estimate of where we're headed is really pretty lousy, but there are also what we'd call big tails. There are some very bad outcomes that you also have to be aware of as you're designing policy, because you want to do something strong enough that you're pretty certain you're not going to have those terrible tails.
So the first endeavor, the first thing you guys need to deal with then is the stimulus. Can you take us in a little bit to the debate: what was being said, what were the numbers that were being thrown around, what you thought needed to happen, and sort of where we ended up.
So again, in those three weeks before the Dec. 16 meeting, that's exactly one of the big issues we were hashing out. I'd say in the campaign, people have been maybe talking, "Maybe we need $200 billion or $300 billion of fiscal stimulus after what's happened with Lehman Brothers."
Then, by the time I was in Washington, well, the number had gone up to $500, maybe $600 billion. And one of the things that I did when I first got to Washington is to say, well, the Council of Economic Advisers, which I had been nominated to head, one of our roles in the administration is the forecast. So I started to work with anybody who would talk to me, so private forecasters, the Federal Reserve, the Congressional Budget Office, anything I could get my hands on, and sort of "What do smart people think about where we're headed?," and then to kind of say, "All right, now, let's get some very standard verifiable estimates of what fiscal policy will do," and kind of run the numbers and say, "For where we're headed, how big does it need to be?" And one of the things that occurred to me is this thing is not big enough, that when we're talking about $500 or $600 billion, that's just not going to cut it.
When I think back on one of the things I'm proudest of was one meeting early -- or not so early, but a couple of weeks into the transition, where we were kind of talking about something else, and I finally say, "I don't think this is big enough, and I really think it needs to be at least $800 billion." And I remember being so shocked when [Director of the National Economic Council, 2009-2010] Larry Summers said, "I agree with Christy." Like, whoa! And so, by the end of that meeting, [Secretary of the Treasury] Tim Geithner and [Director of the Office of Management and Budget (OMB), 2009-2010] Peter Orszag, who I think were a little more reluctant to go that large, were onboard as well.
So I think certainly a part of what we were doing at that Chicago meeting is kind of getting the president's blessing to go bigger than he and bigger than Congress had been thinking to go, at least in the $800 billion range.
Why were you so shocked at Larry Summers' reaction?
Well, Larry doesn't often agree with people, I think is the truth. Or it was, I was I guess thinking maybe there would be more of a fight than there was. And actually I was just impressed that maybe that he and I had come to the same realization at the same time and that there wasn't much discussion. I think maybe the other way to say it is, Larry never does anything quickly or just says yes. It usually comes with a long speech before it.
So anyway, ... then at the Chicago meeting, one, for the political folks to say, "Listen, we're talking about something bigger than you were thinking of," I think that was something. They're starting to sweat and say, "Can we really get this through Congress?" And then certainly I did raise with the president-elect $800 billion is as big as we think it just has to be, but if you went a trillion or $1.2 trillion, that would be even better. And I think there was at that point then a discussion that, boy, maybe we can get Congress to do $800 billion, but you hit that trillion mark, and it's going to be really, really hard. They're just not thinking that way.
Two parts of it that other people complain about now: We talked to Professor [Joseph] Stiglitz a week ago, he being one of them [who was] saying that the numbers were not big enough, or maybe they were big enough, but they needed to be built in so that it would happen for two or three years in a row that you didn't have to go back to the trough, because the political reality was that you were never going to be able to go back. Was there a mistake made on that level?
I think perhaps. I mean, a natural way that an economist approaches a problem is to say, here's where I think the economy is going; this is what we need to deal with the problem. And if we're wrong, if it turns out the economy is headed in a much worse direction than we thought, then you'll go back to Congress, and you'll get another shot of aid for the economy.
And that, in an ideal world, has got to be the sensible way to do it, to say, let me make my best guess. Let's do what we think is right now, and if it's not enough or if it's too much, we can reoptimize.
And I certainly did not count on the kind of opposition that would come to more stimulus. I think that the usual presumption is, if you go to Congress, they're always happy to pass a tax cut or to pass more infrastructure and things. So that had certainly been the norm.
So this idea that we all should have known that we only got one shot, that certainly isn't what's been true in history. I mean, it is the case that that was very much the problem here, that when you go back and you say, "Well, what we did with the Recovery Act was good. It was helpful. It helped to turn the economy around, and it turned out the situation was worse than we thought it was, so we need more," Congress says: "Forget it. Obviously the fiscal stimulus didn't work; that's why you're coming back. So you can't have more." And that is deeply unfortunate.
The other complaint is that basically the stimulus plan was handed over to Congress, and what that did is it mitigated the ability to control, to create jobs, to make sure ... it would do the things you wanted to have done. What's your thoughts on that?
So the important thing is it wasn't really just handed over to Congress. We were working with them day after day. We had very good relationships, both with members of Congress and with the all-important staffs of the various committees.
So I think with the president-elect, very much the call that he made is, you're more likely to get this thing fast and in a bipartisan way, which was something we very much wanted, if we didn't just dictate but worked with them. And virtually all of our big priorities showed up in the final legislation. It was perhaps not as large as we would have liked, but that's because the crucial votes that we needed in the Senate said, "No, we're not going to quite go that way."
But I would certainly argue that the final bill was a very good bill, and it was smart in the sense that one-third of it was tax cuts. Well, that was there because they're fast; they tend to have bipartisan appeal. That's a sensible way to get money into people's pocket. A big chunk of it was aid to people who had been directly hurt, like more supplemental nutrition and unemployment insurance.
And then a piece certainly that we had pushed hard for was aid to state and local governments. We'd been looking at the numbers of how just this recession was taking a terrible toll on state budgets, and they were cutting services just incredibly. And we thought a good way to get money out there fast and in a useful way is to transfer it to state governments. And that's a hard one, because congresspeople tend not to like to just give money to states and say, "You go to do what you think is good with it."
So that was a case where I think the president very much pushed it in that direction.
Explain your thoughts about, were you surprised, pleased about the decision that Tim Geithner would be secretary of treasury? Why him? Why not somebody like [former Fed Chair Paul] Volcker? What were your thoughts on that?
I remember the president-elect had told me that. I went to Chicago for my job interview just shortly after the election and he said: "Let me tell you where I am here. I've chosen Tim Geithner to be the secretary of the treasury, and Larry Summers is going to be head of the National Economic Council." And yeah, it made a lot of sense to me.
Tim Geithner, if you ask, people will say he's the person you want in a crisis, that going back even to his days in the Treasury Department in the Clinton administration to his work at the New York Fed when he was president there, he's always -- he's sort of known as a cool head in a crisis and in how do you manage a really troubled financial system.
So you could see immediately sort of why the president-elect would go to that kind of a guy when it's the fall of 2008 and our financial system is the thing that's on the line. So it certainly struck me as a very sensible way to go.
And then the Larry Summers-Tim Geithner, there's a lot of firepower there. And it makes a lot of sense. You want the very best in a really difficult economic time.
And the understanding and importance of what Wall Street thought -- what was Wall Street's point of view of the decisions, and why that would have been important for the president to weigh?
So I think the connection of Larry and Tim and Wall Street I think is dramatically overplayed. I think poor Tim Geithner, who's never had a job on Wall Street, people always assume that he has. He's been a public servant basically his entire life. So they came at this with an appreciation for how important the financial sector is to the economy and that understanding that we've got to hold this thing together, not because we love Wall Street, but because if Wall Street goes down, the rest of the economy goes down with them. And that was the fundamental idea, and they were people that understood how financial markets worked and what needed to be done to stabilize them.
But very much the focus was always on the overall economy. And you care about Wall Street only because it's kind of the bloodstream of the overall economy.
Let's jump up to March of 2009 now. Tell us a little about the frustration in the White House about the banks. There's the bonuses, the unwillingness to lend, the unwillingness to modify mortgages.
So again, throughout February and March of 2009, or even going all the way back to the transition, there's thinking about the financial system. In thinking about our economic program, the president talked a lot about a three-legged stool, right? So there was the fiscal stimulus side, there was the housing plan, and there's a financial stability plan. So trying to figure out sort of all those things need to be done and healed to get a comprehensive package that really takes care of the economy.
And so we were certainly hashing out the financial stability plan there in the early months of the administration and sort of what do you need to do to not only -- the financial system was tentatively stable then, but the whole question was, how do you make it really healthy? How do you make it healthy enough that it's going to lend again and really be an asset to the economy?
So that was a lot of the discussion about how many bad assets do they [have], how aggressively do you have to clean up various financial institutions to put them in a case that they're really strong and secure. And that's really where the lessons from Japan, I think, were important in thinking -- when people say, "Why did Japan have a lost decade after they went through their financial crisis in the early '90s?," and one of the thoughts was that they never, or for a long time they didn't clean up their banks, that they let them keep a lot of bad loans on their books, and then they kept loaning to the same not-very-good borrowers because they didn't want to have to realize the losses, and that was not something that we wanted to replicate. We wanted to really clean up these financial institutions and put them in a position where they're ready to lend again.
So that was a lot of the debate that was going on, sort of how do you do that? What's the best way to do that? And where we ended up was basically working with the Federal Reserve on the stress tests. So basically let's do a comprehensive checking of the books and figure out who isn't adequately capitalized, and then tell them either you get private capital or we're going to put it in you and make you secure.
So that sort of became the fundamental part of the financial plan, is this scrubbing of the books and this basically telling the financial system: "You don't have enough capital? Go out and raise it."
I think in some ways we got -- I wouldn't call it luck, but part of what happened then in the spring of 2009 is banks were able to raise capital. The stock prices started to turn around, and banks were able, when we told them they needed more capital, to go out and issue stock.
And I think that was in part because of all the other things we were doing. Things like the Recovery Act and those kind of things were helping to take this economy that had been in freefall and turn it around. And that starts to make it possible for stock prices to go up rather than down, and for people to issue stock if they need to.
The meeting on the 15th that has been talked about a lot, what really took place there? What was the debate? What was your attitude about how much you could push the banks, and should you in fact possibly take over some of the ones that were badly damaged, like Citigroup?
So I think nationalization is a term that is definitely fraught with danger, I guess. What everybody was talking about was just sort of how aggressively do you clean up various banks? And it was never that the government wanted to run a bank, but the question was if somebody really wasn't solvent, do you need the government to put in capital, realize the losses, clean it up, and then put it back into private hands?
So that was the most anyone was talking about, is that kind of a cleanup.
And what were you saying?
So I think I was on the side of more definitive cleanup, I think is the right way to say it. So this is the sense that the financial system was sitting on a lot of bad loans, and that maybe we needed to be more aggressive in dealing with them.
And this is actually an example of a really good and strong economic debate. We had some -- Secretary Geithner, who has good people skills -- I think what's true is probably Larry Summers and I were both on the side of we need a more definitive cleanup of the financial system, and the way Tim dealt with that is he said, "Let's have some big meetings." We'd get in his big conference room at Treasury. He'd have dinner sent in, and we'd just argue for the next three or four hours about what's the right way forward.
And what was always -- the things we were balancing off were if you're more aggressive, that is more likely to really clean them up. The other side of that is the more aggressive you are, the more likely you are to freak people out, and maybe we could start another downward spiral or another financial panic.
So it was never some people liked the banks and some didn't. It was always a question of what's the best way to make this financial system really healthy and weighing off we don't want to rock the boat too much that you might set off another panic.
So I would put myself on the side of saying I think we can go further without rocking the boat too much.
So on that meeting, the way it's been told is there's a back-and-forth, and that's being discussed, and finally the president says, "Hey, I'm going to get a haircut or go to dinner," or whatever. And then after that there was a focus on Citigroup. What happened during that evening?
Well, you know, it's funny, because I remember that meeting very vividly. I'd been on, I think, Meet the Press. I'd originally been supposed to go to California that day, because it was my son's spring break. We were going to take him home for a few days and let him see his friends. And then they put me on Meet the Press that Sunday morning, so I couldn't go. And then they called this meeting, but I was on a 6:00 flight. And I was like, no problem, the meeting started at 1:00; it's going to be fine.
And it gets to be 4:00, and we're still meeting. And finally at 5:00, the president says, "All right, we're nowhere. I'm going to go get a haircut and dinner. You all keep working," at which point I called my husband saying: "I don't think I'm coming. You guys have fun in California without me."
But certainly the first half of that meeting was sort of summarizing this debate with the president, sort of there are these two ways we could go. There's how aggressive do you want to be, because an important part, the more aggressive you are, if you really are going to talk about "Let's make these financial institutions realize their losses," these things that right now look like they might be bad loans, just have them, what's often [called] the "rip the Band-Aid off" [approach] and just say, "They're going to lose these; that's going to leave a capital hole." The only way you could really do that is if you have a lot of money; that if they can't raise private capital, you, the government, are willing to say, "OK, we're going to put our capital in and make sure that you're sound and secure."
And the trouble is there was a certain amount of money left in TARP [Troubled Asset Relief Program], but not a lot. So anything -- a very aggressive strategy would mean you'd have to go back to Congress and get basically another TARP if you were actually going to do something very aggressive.
And it was actually when the president left -- so we were having this fight of, do we want to do something aggressive, understanding that it would mean going back, convincing Congress that we need some more public money to recapitalize these banks? And when the president left, [then-Chief of Staff] Rahm [Emanuel] said: "You understand that's never happening, because AIG just paid these bonuses. There is no way anyone is going to give public money to the banking system again."
And that's really what changed the discussion, of saying, OK, well, we were having this nice, important discussion about what's the absolute, the possible ways, the best ways you might deal with this. Now political reality just was imposed on us, of "Ain't no way you're going to get more money to stabilize the banking system."
So then, very much the discussion turned to, all right, what can we do with the money we have? And that's when the discussion was, well, let's do the stress tests. Let's make the stress tests as rigorous and strong as they can be. And if there's some institutions that turn out to be weak and need public capital, well, we've at least got enough there.
And there were certain institutions that were more likely candidates to do less well on the stress tests, and that's what a lot of the discussion was about.
But people like, as you know, Professor Stiglitz will sort of say the stress test was just basically a con game; that in fact the Irish banks and some of the other European banks used the same stress tests, they passed them in flying colors, and then soon afterward they went belly up. What's your take on that?
I think the key thing is they were done well here in the United States. And I think if you talk to experts, they'll tell you that the Europeans could have learned a lot from what the Federal Reserve and our regulators did in the process of the stress tests.
It was one of these -- it was a dynamic situation. So they set what they thought was, here's a really bad scenario. Now let's look at, would the banks have enough capital in that really bad scenario? And when it was started, that was a really bad scenario, and then as time went on it's like, wow, that's not that much worse than where we are now.
So some of that is just the result of deteriorating conditions. But I think they were done in a way that was genuinely rigorous and careful. And certainly I think the administration played a good role in encouraging that and in pushing them. I think that's a place where we were pretty, "Don't let these things be just window dressing or confidence-enhancing." And I think the reason they actually did enhance confidence here in the United States is they were viewed as rigorous and honest and giving us a read on things.
A lot of people argue throughout this process there were opportunities to leverage power, to change the system somewhat, to make a system where the banks were not so much in control because they were so big and you had to deal with them. What were your concerns back then? What are your concerns now about that issue?
I think the main way that we wanted to deal with the long-run health of the banks and this question of "We never want to go through what we went through in the fall of 2008," the focus turned to financial regulatory reform. And that's a case where the administration was incredibly aggressive, and this very much wrote the giant report about "Here's what we're thinking about financial regulatory reform; here's our proposed plan for what should be in it"; that that was the right way to deal with the structural issues [of] too big to fail, and how do we make sure we don't have another crisis and all of that.
And I think that was incredibly important legislation. I think it was fundamentally good legislation. The decision that was made was not to say every bank has to be little, because there are certainly issues of international competitiveness. And you also want a very strong banking system, and you want it here in the United States. You don't want it to all go to the Cayman Islands or someplace where it isn't regulated.
So how do you get a financial system that works for the economy, that's safe, that doesn't ever need government bailouts again? And that's, I think, what the Dodd-Frank [Wall Street Reform and Consumer Protection Act] financial regulatory reform bill is designed to do. And the big way in which it does that is fundamentally with capital requirements. So it changes the regulatory structure. It makes sure that one person, the Federal Reserve, is watching all of those big financially important institutions, including things that hadn't been in the regulatory net, like the AIGs of the world are now in that net very firmly.
But it basically said the best way to make a financial system stable is to make them have a lot of skin in the game, so to have big capital requirements so that if there is a run, if there are losses, there's a lot of investor capital there to take the loss, that it's not immediately the government has to be in there. And I think that is the fundamental logic behind it, and I think it's good logic.
There's a lot of complaints that it's not strong enough. What are your thoughts on Dodd-Frank?
I think the way the legislation was written was, it brought every systemically important institution into that regulatory framework. But then the main way that it does make financial institutions safer is through capital requirements, and that was left to the Federal Reserve to decide what they should be. And the Federal Reserve is working with other central banks, because it's very important to have a consistent framework across the world, exactly so that our financial institutions aren't disadvantaged in world financial markets.
But I think the way that process is going is that capital requirements are going to be substantially higher, and it is going to make the system substantially safer. And I think probably the best evidence that it's going to do that is financial institutions are screaming like crazy, right? How much do you hear them saying, "Let's get rid of this; this is going to hurt our profits"? Well, sometimes you need to do that. They definitely were living too close to the edge before the crisis, and they were not secure enough and well capitalized enough to take the kind of losses that happened. So let's set them up so that they can do that.
So later in March, March 27 is this famous meeting of all the CEOs coming to Washington and meeting with the president. And the president makes a pretty stark sort of statement in the front, saying, "We're the only ones between you and the pitchforks." Were you involved in that meeting?
So you were there. What was it like? Were the bankers in some ways afraid of exactly what might happen? Give us the feeling of that meeting and the lessons learned on both sides from it.
I think in general in this period, I think the president by that point was in a tough position, right, because the banks had been a part of why we'd gotten into the mess that we were in. We were certainly having to do the Federal Reserve and the TARP, all of that, in the Bush administration; we'd had to do just extraordinary things. And there's a lot of anger at the financial system when the president comes into office.
And frankly, he was angry at the banks, too. I mean, look, he had all these things he wanted to do with health care and education and energy, and he was having to clean up this god-awful mess that had been created by a financial system that had absolutely gone a little bit crazy.
And to have bankers come and whine about "How can you be doing these things to us?," and whatever, that's definitely going to try anyone's patience. And I think the president was trying to convey that: "Listen, we understand the financial system is really important, and we understand no matter how much we want to hold our noses, we have to do this, because I care about the rest of the economy, and it's going to go down if you guys go down. But don't give me this junk of your life's so hard, because, for heaven's sakes, you're the reason we're in this mess."
Was there a feeling that the clock was ticking down and the amount of leverage was going to be lost and maybe we can do something about compensation?
There was certainly some discussion of that, I think. Again, I mean, I think both the president and certainly the economics team, we are, for all of the caricatures in the press, we are people that tend to believe in markets. We're happy to intervene in markets when we think somehow the private sector isn't working well. But this -- the thought that the government should be micromanaging pay and things like that, that's something that I think most of the economics team, that's not something we'd normally think. I don't think the government should be going to Google and saying, "Here's how you should be paying people." Usually market forces are the things that determine that.
So I think we certainly are cognizant of being good stewards of the public's money and making sure that we got paid back any of the TARP money and stuff like that. But I think this question of, "Gee, we've got them over the barrel; what can we force them to do?," I think is not good economics, and it's something that I think there was a lot of resistance to that kind of --
But you have the reputation of being someone that was in the administration who was fighting for more government intervention in the system to make it better.
So I was certainly fighting for what I described as the definitive cleanup. I wanted to make sure that those financial institutions were well capitalized, that they weren't hobbled going forward, because I wanted them to be strong enough to lend.
And that was certainly -- that was what I was interested in. And if it took more government action to do that, that was one thing, right? But it was never [that] I thought the government could do it better. It was, how do we make these institutions stronger, more stable, more secure, so that they feel able and willing to lend?
The Fed and Treasury were approving enormous amounts of money that was flowing into these banks, banks that, by the way, at the same point were saying, "Hey, we're healthy; we don't even need the TARP money." TARP money is nothing compared to these low-interest-rate loans that they were getting. What are your thoughts about why that was felt it needed to be done, and why it needed to be done basically in secret?
So I think the important thing is the Federal Reserve in the fall of 2008 was basically the institution that was holding the financial system together and, because it's so important, holding the American economy together. And you will get no criticism from me about what [Chairman] Ben Bernanke and the Federal Reserve did in that period. When he was named Time's Man of the Year in 2009, I was in the car clapping, because I firmly believe that he played a crucial role in taking -- all of the initial shocks, the decline in the value of houses, the crash of the stock market, all of those things we were at least as bad as we were at the start of the Great Depression. And the reason we did not go to the kinds of horrible depth that we went in the 1930s is I think in large part because the Federal Reserve took incredibly extraordinary actions.
So I think that's the important part. And the way you deal with a system that's in the middle of a financial panic is to flood it with liquidity. It's what you teach your students, that if everybody decides that they're nervous and is trying to get their cash out of the system, that's exactly when -- even a perfectly healthy bank, right, that has its loans out and things, if everybody comes at once and says, "We want our cash," they say, "Wow, I've got to liquidate some of these very long-term assets that I have at fire-sale prices; I'm going to be insolvent."
And that's exactly the situation where you -- it's why you set up a central bank, so that in that situation, somebody can say: "You don't have to do that. We're going to get you the liquidity you need to deal with your depositors that are getting nervous." So that's the appropriate thing to do. And they were doing it.
In terms of why you do it in secret is precisely because -- we actually had some experience of this in the 1930s, that if you announce "This bank just got a really big loan," their depositors say, "Ooh, I guess they really are in trouble," and they start to run on that bank, so that in fact, there's a legitimate reason for not making that information available immediately when it's going on.
... Was there concern over what the reaction of Congress would be if they understood the numbers, the trillions and trillions of dollars that were actually going out?
So how Congress would have reacted, I think it's hard to know. I think Congress tends to not be completely rational about the Federal Reserve. I think we set up a central bank -- basically every country in the world sets up a central bank precisely because in a financial crisis, you need a lender of last resort, someone that can provide that kind of liquidity. And it's the appropriate thing to do. It's why you set up a central bank.
But in the heat of the moment, I don't have complete confidence that Congress would have said, "Oh, I understand." There would probably have been some fallout. But I'm sure that's not what the Fed was thinking about. I think they were absolutely thinking of this idea that secrecy is important, precisely because you don't want people to be taking as a sign of a problem that a bank is getting a loan.
Let's jump up to the end of 2009. So you're getting some numbers back that look halfway decent.
Better end-of-December-than-November numbers, you report to the president in December.
[President Obama] then goes out on his Main Street tour, and he's sort of talking about the fact that maybe the green shoots are showing up. He's in Allentown, [Pa.] It's a short-lived optimism. Explain what you thought at that point and sort of why it didn't turn out that way.
I think the important thing, again, if you think about the turnaround in the American economy -- so think about the end of 2008, beginning of 2009, real GDP [gross domestic product] is falling at just an amazing rate. In the fourth quarter of 2008, it fell at almost a 9 percent annual rate. That's just a huge decline. And by the third quarter, the fall of 2009, it's actually growing again. So that's just an amazing turnaround, and I think policy played a huge part in that. Things like the Recovery Act really were a big part of why we turned the corner.
Even so, one of the big debates in the fall of 2009 is, don't we need to do more fiscal stimulus; that we'd done the Recovery Act, it was sensible at the time, but then things turned out worse than we had anticipated, and even with the fact that we were starting to grow again, the unemployment rate was still terribly high. So we were having a very active discussion of other job-creation measures.
You were fighting for more stimulus.
You were on the losing end of that.
Well, not really, in the sense that I was certainly fighting for this. Larry Summers was actually on my side as well. And actually, even though the president was -- we got some moderately or certainly better news that fall, the president was behind that. I remember he gave a speech at the Brookings Institution there in December that was basically calling for more aid to state and local governments, more extended unemployment insurance, some more infrastructure spending, a job credit for firms that actually hire people.
So a lot of the things that I had been pushing for he endorsed. They then kind of -- most of them did not come to fruition. Or they came to fruition in a much more watered-down form.
But I do think that that was -- the president -- nobody was sitting on their laurels. We were delighted to see things starting to turn the corner, but you have to remember, the unemployment rate was still 10 percent or above there in the fall of 2009, so we were in no sense saying, "Oh, problem's over, right?" The problem was still front and center in trying to think about how do we make more progress in bringing that down.
And did we take our eye off the prize of housing? You've written about that recently, about how important it was, and perhaps we didn't push hard enough there, because it's at the center of the crisis really. Tell us a little bit about where your thoughts are on that.
Yeah, I think housing is a really tough issue. And at the time, we did -- again, the administration did careful work, sort of looked at the academic literature and said the main thing, if what you want to prevent are foreclosures, the main thing is to lower people's payments; that what puts people into foreclosure is often they lose their job or they get sick or they get a divorce, something that makes them unable to afford their payments. So we had designed a program that basically tried to lower payments for people that got into trouble.
But I think what the new research is showing us is that maybe there's a problem from homeowners just being what we call underwater, which means that their mortgage is bigger than what their house is now worth, because house prices have come down.
And what that research seems to say is that heavy debt loads that come with things like being underwater on your mortgage does tend to just hold back consumer spending. So one of the things that I've been thinking about is maybe we did need to be more aggressive in dealing with so-called negative equity. What do you do with these homeowners?
And the problem there, I could never support the government just doing it, to say: "Well, we're going to write down your mortgage. Here, we're going to make the bank whole so they don't lose any money, and the only people that lose money will be the taxpayer." That just didn't seem right. But I think something that forces financial institutions to write down underwater mortgages, I think, would be a sensible thing to do.
And we could have been stronger on that.
We could have. I mean, again, in those early months, one of the debates was, do you reform the bankruptcy law? Right now a bankruptcy judge can write down lots of loans, but they can't write down first mortgages, right? So all you can do with a first mortgage is say to the bank, "Here, you get the house." And it's the phenomenon, it's called cramdown if you allow a bankruptcy judge to write down the principal, to restructure a first mortgage.
And that was something that was being discussed, and I think ultimately we didn't push for it as much as perhaps we should have. Again, probably for a legitimate reason. We were worried about the strength of the financial system and maybe that would be something, again, that would rock the boat a little bit. But it also might have been the one time when we could have gotten that through is the early days of the administration, when things were so bleak.
And so it's something I wish we could do now. Again, the financial industry fights it like crazy.
So [presidential adviser Pete] Rouse eventually writes these memos about, I guess after the midterms, his annual memos that he writes, and he wrote that there was deep dissatisfaction within the economic team, and he talks about some of the problems that existed. What were the concerns about the way the team worked? And what do you believe to be the truth?
So what is certainly true is the economics team had [what] we often called the four economics principals: the secretary of the treasury; the head of OMB; Larry Summers, the head of the National Economic Council; and the chair of the Council of Economic Advisers. I think what's true is we were all strong personalities, and strong personalities with sometimes very different viewpoints. And I think we didn't hesitate to hash things out in a very forthright manner.
So that's the basic truth. And it's interesting. I mean, it's the way economists naturally tend to interact with one another. I've learned from my academic colleagues in different fields that their seminars aren't nearly as contentious as ours are, where we just don't hesitate when someone's come to your university to represent a paper, to say, "I think that's wrong, and here's why." And I think that was naturally how we tended to interact with one another.
I think for the most part there was a lot of mutual respect. It sometimes broke down, or sometimes people were mad, and sometimes it did feel like things weren't working quite well. I think the big picture is, for the most part we were incredibly successful, that we got through a lot of important policies, everything from health care reform to financial regulatory reform to the Recovery Act.
I think a time when it did feel somewhat dysfunctional was the fall of 2009. So we'd gotten through the worst. We'd done some extraordinary measures. But the figuring out what more needed to be done there in the fall of 2009 I think was not one of our better episodes, that there was a disagreement about should we do more stimulus? Should we do immediate deficit reduction? I'd say we'd all agree we need to do long-term deficit reduction, and we were all enthusiastic about setting up the bipartisan fiscal commission.
But that question of right then, do we push for another stimulus or do we start to immediately worry about the deficit, that one where we were kind of at loggerheads and we just kept fighting about it in front of the president --
And I remember one time when I think an interviewer said, "So do you ever lose your cool?," and he said, "Why, yes, I lost my cool yesterday with the economics team, where I finally just said: 'OK, I'm tired of hearing this time after time. I'm going to go away now.'"
So I think that was a time when we should have gotten our act together better. I think we did not serve him as well as we should have. I obviously wish we had done a very aggressive, another round of stimulus. And I wish I'd convinced everybody on the team and we could be a united front telling the president this is what needed to be done. I think we didn't necessarily do that as much as we should have, and that didn't serve him well.
The president is out there now campaigning, and he's a got big problem to some extent because of course the economy and the handling of the crisis is what everybody is focused on. There's a lot of anger, and there's a lot of frustration out there. Part of the anger and part of the frustration is this feeling that the banks got taken care of, but Main Street did not, that individuals did not get a plan that is designed to help them. Why are we at that point, and how difficult does it make the president's role in the re-election?
So I think the first thing -- and I'm sure the president will tell voters this time and again -- everything he did was about the average person; it's not about the banks. Even when we were doing things for the banks, it was about the collateral damage, all of the people that would be hurt if the banks went down.
And if you think about the things that he's done, from the Recovery Act to the various extensions of unemployment insurance and the extensions of the payroll tax cut to health care reform to financial regulatory reform, all of those things are designed to help this economy be stronger, more stable, and to create jobs.
So I think the thing that people can rightly say is, "I wish you'd done even more." But [if they] say that what you did was not aimed at job creation and aimed at dealing with the fundamental problem, I think that's deeply wrong. That was always the focus. That was always the thing that he cared most about.
You're an economist, but you're also someone who understands Washington quite well right now, because you've been there; you've experienced it. Do you think you look at it politically? Do you wonder maybe if we had done -- maybe if we had just done Citigroup, maybe if we had come down hard on one bank, maybe this anger would have been stopped and politically it would have been a better decision to make?
No. You say I understand Washington. Even having spent some time there, I will never say I understand Washington. I understand the economy much better than that.
The playing the what-if is I think very hard. I think the thing I have found the most frustrating, and frankly a little disillusioning, is the degree to which partisanship has just taken over. And I don't understand why members of Congress don't worry more about their constituents who are so clearly suffering.
And it seems to me the American people desperately want their policy-makers to deal with jobs and to deal with the long-run budget deficit. And those are two things we could deal with in a coherent manner. The president has tried. He tried last spring with "Here's a grand bargain; I'm willing to put some really hard things on the table if we can get a plan for long-term deficit reduction." He tried valiantly all fall to say, "Here's a good jobs proposal; it does serious help for the economy." And he is just fighting what seems like a battle that nobody could win, because there is such partisan opposition in Washington.
In the end, are you disappointed at all about what you all were able to do with that period of time, in the period of time that you were there?
Well, of course you'd have to be. The unemployment rate is still terrible. And as much as I can try to say, well, it would have been much worse had we not taken the actions that we did, and I believe that deeply, I wish we could have done more, because it's terrible for people who are suffering.
So you can take a little bit of solace from the things that you did accomplish. And I think when the history is written about what this president accomplished in terms of health care and financial regulatory reform, and stopping what so could easily have been another Great Depression, I think history will be kind to him.
But for the American people, absolutely I wish we had done much more so that today the unemployment rate was down to a normal level and we were growing like gangbusters.
Just this morning, I think it was [Mitt] Romney who once again brought forth that report that you and [Chief Economist and Economic Policy Adviser to Vice President Biden, 2009-2011, Jared] Bernstein put out early on about what the unemployment figures would be. Tell me about why the optimism of that moment went awry and how it has come to haunt the president now. What's your thoughts on that?
You know, that's a sad period in my professional career. What that report was was sort of an honest attempt to show the world what we were thinking. We were doing a Recovery Act; it was bigger than anything that had been done in history. We were trying to talk about what we thought it could accomplish, about how it would raise employment relative to what otherwise would have happened, and what it would mean for the unemployment rate.
And the frustrating thing, from my point of view, is our estimates about what it would contribute have turned out, I think, to be quite accurate. When others have looked at how many jobs were saved or created by the Recovery Act, we said it would be 3 million; most of the estimates are saying, yeah, it probably was about 3 million.
I think the trouble was the trajectory that we were headed on without the stimulus. And that's where we, like almost every other forecaster, didn't recognize, didn't get how severe this recession was going to be. We thought it was going to be bad, but it turned out to be even worse.
So it was -- we made a mistake in the baseline forecast, but our estimates of what policy has accomplished has actually turned out to be pretty accurate. It's just we in fact needed to do more.
I think what I find frustrating about people like Gov. Romney is that they have to understand that it wasn't that the Recovery Act didn't work, and it wasn't that it wasn't a useful program. It's that the economy, it turned out, was much sicker than we'd thought. And yet they still use that as sort of a cheap talking point.
And the analogy I like to use is, if you have an infection and you go to the doctor and he gives you an antibiotic, and that night your fever goes up, you don't say, "See, I knew that antibiotic didn't work." You'd probably say, "I was sicker than I realized, and it's a good thing I'm on that antibiotic." And that's exactly what happened with the Recovery Act. We were taking the right medicine. It turned out we were sicker than we thought.
And I think that's why I tend to focus on when we realized that, when the data started coming in that, "Whoa, this thing is worse than we thought; it turns out it's happening all around the world, not just here in the United States," that's the time to say: "You know what, Congress? We need another big chunk of money, because this thing was worse than we thought. We need to fight it even more than we're doing."
That, I think, that's the thing I'm sorry that we weren't able to then take that next step.
The final question is the lessons learned. How does the economic philosophy intermix with the politics of Washington to bring a healthier country? Are they so at odds? And was that something you guys were dealing with the entire time you were there, is the reality what can we do; what has to be done; what can be done?
What I hope is that politics changes. I mean, the key thing is making policy based on evidence, and that's something that the president is so incredibly good at. When I think back on our discussions -- I often tell the story, we had this daily economic briefing, and when I was in charge of it, I'd make the slides that we'd give to the president. And the number of times people would say, "You can't bring a regression into the Oval Office," where I'd have all these diagrams, and I'd say, "I know the president wants the evidence." And sure enough, you'd be in this meeting, and he'd say, "What's this outlier over here?," or, "Have you thought of this," right? He was not only understanding all of the economic evidence, he was critiquing it.
And that's how we made policy, that these decisions were made, maybe to his detriment, on the basis of what does the evidence say. I remember, he would often say, "You tell me what's right, I'll figure out how to sell it," right? That is, as an adviser, what could you want more than that, than someone that said, "Show me the evidence, convince me on what's right, and I will move heaven and earth to try to make it happen"?
And what worries me is the degree to which other people in Washington aren't like that. And it shouldn't be the case that a member of Congress can just say something that goes so against the economic evidence because they can find one not-very-good economist that will say that thing, even though the vast majority say that's not true.
There ought to be a cost to saying things that aren't true and to having to listen to the evidence and make decisions based on that. And I'm never going to give that up, to just say, "I'm sorry; that's not the world works." Well, that's the way the world should work, and if it doesn't, we should change it.
"The FRONTLINE Interviews" tell the story of history in the making. Produced in collaboration with Duke University's Rutherfurd Living History Program. Learn more...