Jared Bernstein

When Lehman happens, that weekend, are you involved in telephone conversations with the campaign?

Yeah. I was involved in some conversations with the campaign. … I don't recall being on phone calls with the candidate then, but certainly the economics team was talking and trying to figure out what was coming down in real time.

Scary time.

Yeah, I mean, when you're in campaign mode like that, what you're trying to do with your team members is figure out what's going on here that's going to ripple through the economy in ways that people need to hear the candidate talking about.

So obviously, he can't go out and say, "Something's happening and I don't know what it is, but it sounds pretty bad." We have to try to give him some authoritative understanding of how this is breaking. And that's what we were trying to figure out.

How were both your bosses at sort of taking that in and turning it out and developing policy and being able to define it for the public?

I thought then, and I think even more so now, that President Obama has a pretty uncanny ability, nothing I would ever have expected for a Constitutional lawyer, to understand and explain the complexities of financial markets. When we used to brief him during these daily economic briefings early on in the administration, he actually wanted pretty granular information about yields on credit default swaps.

I remember once [former Federal Reserve Chair and Chair of President Obama's Economic Recovery Advisory Board] Paul Volcker joined us for a meeting in the Oval about this stuff, and afterwards he said to me, "I've never seen a president get into that level of economic minutiae about this stuff." And the reason was because the president, he was building an argument from the bottom up. He really wanted to understand what was going on in financial markets. Basically, his prescription was going to flow from a pretty deep diagnosis.

… How was the stimulus framed, and what was the debate over how big it should be?

Well, it certainly wasn't if, but it wasn't just how big either. It was how big and what should its components be and what kind of legislative barriers are we going to face, because if we come up with the greatest stimulus since Keynes's and we can't get it over the legislative barrier, then it's not going to help anyone.

So I would say those three challenges were in front of us at the time: size, composition and getting it over the legislative hurdle.

Can you tell us a little bit about what the debate was like?

Sure. In terms of size, I think it's fair to say that we recognized we needed the largest Keynesian stimulus that the market could bear. Now, what's the market? I'm not really talking so much about the economic market, because I don't think we thought we could fill the whole output gap just in terms of how deep the recession was.

What I'm really talking about here, in part, is a political market. We were talking from the very beginning about stimulus measures that were many hundreds of billions larger than anyone had ever contemplated. And to this day, people criticize the Recovery Act as not being large enough, and I take their point. But I think what they forget is we ended up with a plan that was around $800 billion; at the time members of Congress were talking about plans that were in the $200-300 billion range and balking. …

The president and the vice president, from the very beginning, stressed accountability. … In our minds, there was real concern that we did not want boondoggles. This money had to be spent in ways that were effective and transparent and accountable. There's often a tradeoff there between speed, injecting the medicine into the patient quickly, and that kind of transparency and accountability. But that trade-off was important to us.

… When you look back at it now, what was done right and what was done wrong. What should we maybe have known? What did we learn from it?

When I look back, I'd say the thing that I would have argued for doing differently was, about a third of the stimulus, about $290 billion, was in tax cuts. …

For tax cuts to really help you in a stimulus sense, the recipients have to spend them. We still have a 70 percent consumption economy, so if they're not spending their tax cuts, they're not stimulating the economy. If they're spending those tax cuts on imported goods, that stimulates somebody else's economy.

I think with hindsight, you can say that the tax cuts definitely helped, but they didn't have the kind of bang for the buck, the kind of job creation impact that some of the other measures had.

State and local fiscal relief, for example, turned out to be very effective stimulus. Forget the modeling, I recall mayors with pink slips in one hand that they were about to administer to their police or their educators and stimulus checks in the other hand, and then ripping up the pink slips. I know it's dramatic, but it actually occurred.

Same thing with the infrastructure. People complain that it took too long for some of it to come online. That never struck me as a problem, because we just knew how long and deep this thing was going to be.

… What was the stimulus? … How did you understand the problems that could occur and how directly was it tied into the issue of jobs?

Everyone on the economics team had the same orientation -- and in fact, the vast majority of economists have this orientation -- which is that what was really going on in the economy at that time, most damagingly, was not the housing bubble bursting and the credit freeze. All of that was very symptomatic, but it was the contraction of demand.

In an economy like ours, if consumers aren't buying, if customers aren't in stores, if investors aren't active, if people aren't just out there generating economic actively, which is what economists call demand, the unemployment rates start going up. People are just going to start losing jobs, employers won't be creating jobs, because they don't have any incentive to do so. …

The idea at that point, with that enormous amount of money that was going to be spent on the stimulus, was, okay, this is going to bring back employment. You and [Council of Economic Advisers Chair Christina] Romer got in a little bit of trouble when you put out that report, which said that the stimulus would bring [unemployment below] 8 percent. …

The research that Christie Romer and I did early on was very much targeted at how many jobs we thought this amount of stimulus would generate, and how many points it would shave off of the increase in unemployment. We felt the stimulus would generate something in the neighborhood of 3 million jobs -- that is, either jobs that otherwise would have been laid off or create new ones. And we thought that it would subtract a couple of points from the increase in unemployment.

Now, it's not that we thought unemployment wouldn't go up; we knew it was going up. We thought it would go up maybe a couple of points less if the stimulus of the magnitude that we ultimately passed was successfully implemented.

What we clearly got wrong was the level of the unemployment rate. We used the consensus estimate among economists at the time, and that was too low, because few people really saw just how deep this downturn was going to be.

But what we actually got right is confirmed by, say, the nonpartisan Congressional Budget Office, was what economists call the delta, the difference between where things would have been and where things actually ended up. …

There's been a lot of criticism, to this day, that the president and the economic team was naïve, because we thought we'd be able to come back to the well for more stimulus measures if things were worse than we thought. …

I don't think anybody saw the extent of partisan rancor that exists now, even four years ago. A lot of this criticism is 20/20 hindsight. It never occurred to me that the minority leader in the Senate, Mitch McConnell, would say, "Our number one goal is to defeat the president," as opposed to, "Our number one goal is to bring down the unemployment rate," or something.

And you can say it's naive to think that after an $800 billion stimulus we wouldn't be able to come back for more. But I think that there's a lot of 20/20 hindsight on that particular kind of critique.

The March 15, 2009 meeting, dealing with banks -- there's lots of different opinions about exactly what was acceptable or what was not, this idea of nationalization or not. … Was there a real plan, or a real thought that in fact probably some banks would have to be taken over? What was the thinking around that period of time?

The thinking at the time was that we had to do whatever it takes to most efficiently get credit flowing again. And that meant that lots of toxic assets on balance sheets had to be dealt with as quickly and efficiently and cheaply as possible.

The question as to whether nationalization, conservatorship, taking over these banks was the best way to do that was in the room. But it wasn't the obvious first, best option. I mean, I remember some discussions where experts in such matters explained why that might work a lot better in Sweden than it would work in the United States, and making pretty good substantive arguments.

So what was the argument for nationalization?

The argument of nationalization was very much a kind of rip-the-Band-Aid-off argument.

It was an argument that asked, are we looking at a liquidity problem in our banks or a solvency problem? Are our banks insolvent, in which case, by far, the quickest and best way to go is to rip the Band-Aid off and nationalize? Or are we looking at something that's more of a temporary liquidity nature, because of some bad investments? If we help reflate them for a while, we can get in, we can get out, and they'll be back in business. …

Greece looks to me like insolvency. The U.S. at that time looked to me much more like a liquidity issue.

But the way that meeting, the 15th, specifically has been discussed is that at least the option of taking over one or two of the banks that were in a worse situation, like Citi, was an option that was being considered.

I'll tell you what my view is, and I don't know that I was in every meeting on this stuff.

From where I sat, from the meetings I was in, the option of nationalization was out there. But it was never an option that got all that close to the finish line, as far as I could tell. I think there's a view that the idea of nationalizing even a few banks was very close to a decision that the president made. I don't think that's quite realistic.

How does it connect with the debate going on at the same time about the use of stress tests?

… I think some of the debate and discussion and argument back then was, is this stress test going to be as revealing as you think it is? Or is it going to be a way to make the banks look healthier than they really are to stave off any possibility of nationalization or taking them over in ways that would be distasteful in a capitalist economy?

And your thought?

At the time, I was skeptical. I worried that the stress tests wouldn't be as revealing as I think they ultimately were. The way this all played out had really interesting kind of path dependencies going on. I think the results of the stress tests signaled many in the investment community, in the economy that actually the banks were healthier than we might have thought. That led to more confidence in the system, and that in itself helped, I think, to generate a better credit flow.

So I was one who was critical of the stress tests and worried that the scale was going to be tilted in a way that you get the result you want. But looking back, I actually think they were pretty effective.

And so, your response to somebody like Professor [Joseph] Stiglitz, who we talked to, who still maintains that they were a con game and that the same stress tests were given to the Irish banks, who passed it, and then they went belly up.

I think the Irish stress tests were a good example of the kind of tests that I was worried about at the time. I thought that they wouldn't provide us with the diagnostics we need. I mean, you could do a phony stress test or a real stress test. And it looked to me like ours were ultimately pretty realistic. …

I think the stress tests suggested less insolvency and more liquidity, such that more temporary injections, like we got from the TARP, would ultimately help. And I think the evidence has borne that out. I mean, what did Stiglitz say about that?

He has a different opinion. … He basically thinks that we got over a hump, but the reality is that they never gave us a true understanding of the nature of the problems that some of the banks had. Of course, he's still saying that the "too big to fail" banks are only bigger now.

Well, that is true. … Part of this is your definition of success. What worked? I mean, the credit system is up and running. Beyond, obviously, Lehman, we haven't had large bank failures that have cascaded through the economy.

And if anything, the financial sector is highly profitable again. I think the problem is that they're about the only ones that are highly profitable right now. And so, that leads to, I think, very justifiable anger at bailouts that didn't help the middle class enough.

[Treasury Secretary Tim] Geithner takes some of the blame from people that think that that is indeed the case, and that the rest of Main Street didn't receive the same benefits as Wall Street did. What was his philosophy? The way it's been defined is a do-no-harm philosophy. And some people say to some extent it was coddling the banks, because the necessity was to save the banks at that point.

I think Tim's kind of policy framework and views on this have not been well understood. It was never his view that we should bail out the banks to save Wall Street. His view was that it's very hard for Main Street to be successful if Wall Street is shut down.

There are credit flows from financial markets on Wall Street and across the globe to the smallest business on Main Street. The idea was always about those kinds of interconnections, that if the credit system is shut down, there's going to be some small, tiny manufacturer there off of Main Street who won't be able to roll over a loan and restock their inventory.

And I think that that fairly simple connection was never made such that it looked like all we wanted to do was to help these banks become profitable again. But the Wall Street/Main Street credit connection was always at the heart of our thinking.

You've been quoted as saying that you thought maybe to some extent the Lehman lesson was overlearned. What'd you mean by that?

I think one of the mistakes that policy-makers can make when it comes to financial market oversight is to worry that these institutions are so fragile that if we put down any rules of the road, they'll go to Europe, or they'll go to China, or they'll shut their doors and that'll be it. And that's a kind of overlearning this Lehman lesson, such that you treat these folks with kid gloves.

And ever since Adam Smith, the founder of modern capitalism, it's been widely known -- and I think we've forgotten this, but it should be widely known -- that financial markets are actually inherently unstable. And if you believe that they can police themselves, which was a very much Greenspanian kind of belief that started to dominate over the last few decades, you're going to be right back where we were, with the same kind of credit bust-and-boom cycle that have taken this economy down more than once now.

Some people complained that all these progressive economists were all around Obama during the election, but then he brings in the Clinton team, basically, much more conservative in a lot of ways. …

At a very fundamental level, it's not liberal or conservative economics, it's a matter of getting the credit system back up and running. …

I think where you maybe see a breakdown between conservative or centrist, more liberal economists is in this idea of regulating financial markets.

Sure, there are Democrat, supposedly liberal economists who believe that the fragility of the financial sector is such that if there's too much oversight, if we're not kind of ginger in the way we handle these banks that they'll leave the country, they'll tumble. If there's any kind of a tax on financial transactions, they'll all go to Europe, or they'll all disappear.

That's a problem. We need more economists in powerful places who have a more realistic view of, frankly, the durability of that sector, and what terrible things can happen if there isn't enough oversight.

I mean, if you're all thinking these institutions can police themselves, and you haven't been convinced otherwise yet, then you really shouldn't be hanging around halls of power.

Before we move on … this idea that Geithner was taking sort of the idea that perhaps we would nationalize Citigroup and then slow-walking the parts of the policy he didn't agree with. Was the president being slow-walked?

The president was never being slow-walked. Whoever said that just got it wrong. Was the president as exposed to as many good, knock-down, drag-out debates about this stuff as he should have been? With hindsight, maybe not enough. But he was apprised of the options, and nothing was slow-walked.

It sounds like this president more than any other president ever was involved with the economic debates daily.

Yes.

But if he had had other sort of views brought in, what do you think the result would have been?

I don't think the result or the outcome of policies would have been different, but it perhaps would have been better if the president had been exposed to more knock-down, real intense debates between economists with different viewpoints.

The way these things tend to work, and not just in this White House, is that you have those discussions and you sort of bring them to the president as "We have concluded." Or maybe there's some argument between this person and that person. In this case, perhaps there could have been more argumentation of that type in front of the president. But nothing was slow-walked.

To give you an example, once [I was] meeting with the president and a bunch of liberal economists. I'm not going to tell you the content of the meeting because that would be inappropriate. But I think the president learned something in that meeting that he wouldn't have if his team sort of filtered it and took it to him that way.

So if I had a chance to do some of this over again, I don't know anyone would listen to me, but I think I probably would have pushed to expose the president to more debates from different parties.

One of the things that has come out is [Obama senior adviser Pete] Rouse's memo in which he said that there was a problem in the economic team, that [National Economic Council Director Larry] Summers was heavy-handed, that talks of constant relitigation. Relitigation kept on coming up over and over again, causing delay in making decisive decisions. Did Rouse get it right?

I think Pete has a point, definitely, but it's been misunderstood as if Larry was somehow feet-dragging or delaying the process.

What was happening at that time was the economic team was largely thinking about the importance of another round of stimulus. And the political team was starting to wonder, is that something we can do at a time when this stuff isn't as beloved as you economists might want it to be among our public.

So what could have happened? What should have happened?

As an economist, I think we should have built on some of the momentum that was coming out of the Recovery Act. I suspect the unemployment rate would be considerably lower now if we had.

But there were very clear political constraints, particularly as we're moving up towards the midterm and after that, which was very much seen as a vote against government spending.

But then you've got the other side of it, which is the fact that Obama's being blamed now for the unemployment figures.

Right.

So did the political team get it wrong? Because the reality is maybe this is going to come back to bite them, and Obama could lose his job, specifically because of this point.

It's not up to the political team to say, "Here is what the unemployment rate will look like a few years from now, sir, if you take the economists' advice." It's up to them to tell the president how these policies are playing out in the minds of the electorate.

I think what was going on at that period where members of the team are being accused of argumentation and feet-dragging is more like we recognized that we needed another dose of stimulus to build on some of the momentum of the Recovery Act, which was already beginning to fade, while the politics were pushing in a very different direction.

You're being torn asunder at this point also because the deficit is the thing the Republicans have been pushing. …

Well, that's a good point. I kind of left that out and you're fair to remind me.

So there are really about three dynamics going on here. One very much supported by some members of the economics team is we need to build on some of the momentum from the stimulus. The economy is in worse shape than we thought. And some of these stimulus measures are starting to take hold; we're seeing some good stuff happen, but we really need to build on it.

There's another political view, then, that sweeps in and says no more spending. The electorate is fed up with it, they don't believe this stuff works. We may be fine Keynesians, but we've got to pay attention to that.

And then there's a third view, again coming from partly economists and partly the political guys saying, we've got to start worrying about the deficit.

So there are these headwaters here all colliding.

… [New York Times columnist Paul] Krugman early on in 2008 is writing about [how] if you want to stay out of a depression, you've got to spend the money when you need to spend the money. In this period of time, when all of a sudden the deficit is becoming the third part of the memo that comes through, is the economic team sort of saying, wait a minute, and throwing their hands up and saying–

First of all, Paul Krugman has been 100 percent right about this, particularly on the issue of deficits and debt. What we were talking about at the time is, even the most deficit-hawkish among us was saying, sure, we need to do accelerator now and break later. … But somehow the break later stuff, especially in the context of the political belief that the electorate was really beginning to sour on anything that smelled like government spending or stimulus, it seemed like the deficit began to be a winning political issue.

To this day, I view it as exactly the wrong economic issue at a time like that. But sometimes politics and policy collide in a good way, and sometimes in a bad way. And this was more in a bad way.

And what problems does it cause then? What did everybody have to do?

It causes two problems. First of all, it's actually much harder than you think to explain to the public we have to spend more now and spend less later. …

I also think it causes a policy problem, because the minute you start talking about deficits and debt, you're worried about the bond market –-- even with no evidence, by the way, that the bond market was or is at all where the deficit hawks say it is or should be -- it just begins to infect the conversation.

And it's very hard to move the kinds of stimulus that we needed at the time when you've got a bunch of people biting their fingernails over invisible bond vigilantes.

And in the end, it was impossible, therefore, to push forth the new stimulus.

It's an interesting question. I think demonstrably, it's been impossible to legislate new stimulus. However, at some level, the Keynesians won in the sense that the president proposed a $450 billion American Jobs Act. And the politicos, well, they kind of won, too, because they would have said that no way is that going to clear legislative hurdles and they were right. …

And in the election it will become a potent political tool?

The president's not going to run on Keynesian stimulus, but he certainly is, and I think he signaled this in his last State of the Union, is very much running on the notion that there is a very recognizable, and I'd say fairly aggressive role for government to play in job creation, in dealing with these problems of income inequality and wealth distribution and immobility, manufacturing employment. The president's been leaning hard into those and that's going to be part of his election year message, I believe.

I'm going to take you back to March 27 [2009] now, the White House meeting [when] the CEOs came to town, the bonus stuff is all on the front pages. And so they're worried, because they don't know where this president is going. The message that comes out is, the administration is not going to force them to lend in ways that they don't agree to. It's not going to deal with compensation questions.

Well, that's not quite accurate.

But the president says, "Hey, we're the only ones between you and the pitchforks." It seems that the bankers come out of that meeting though thinking, "Well, yes, he slapped us on the wrists, but in the end it still our decision." And the critics say this was the period of time when you should have kicked their butts. This is the period of time you could have come down on them.

The one point I disagree there has to do with compensation. We actually had rules enabling us and Ken Feinberg to provide oversight to their compensation decisions.

But you have a point. With hindsight, I'd say we should have tried to extract more from the banks, particularly in terms of lending. It was frustrating to be providing them with the resources they need to stay alive, and yet they didn't seem to be lending into the economy in ways that would have helped pull forward the recovery.

So how angry did this make the president?

The president -- I'll tell you. The bonus and the compensation stuff made him more angry than I'd ever seen him. I mean, oftentimes with President Obama, if he was annoyed, you knew it because he would say, "I'm annoyed." When it came to the bonus -- I remember him, like, really standing up out of his chair in the Oval Office during the AIG bonus compensation stuff and just being really pretty livid.

One thing he would not stand for was the American people being played for as chumps by these banks. And that was something he just really didn't like.

Some people will say, yeah, he might have been mad, but nothing came out that sort of forced him to change.

I think it's an unfair claim on compensation. Because on compensation, we put a guy named Ken Feinberg, the compensation czar, in the Treasury, and the man had oversight over these banks' compensation packages. That's a very big move in a capitalist economy.

I think where you could criticize us was that we didn't ask enough out of the banks in terms of their taking some of those bailout funds that were helping to reflate their books and lending back into the economy.

Now, at the time, remember, it was leverage that got us into this mess. So there is a bit of the hair of the dog that bit you there. And you have to be mindful of that dynamic, too.

Was there a surprise that Wall Street didn't come around though, that it didn't listen to the message, it didn't listen to reason, that they had such a tin ear when it came to bonuses?

That did not surprise me. [laughter]

Did it surprise others in the administration? I mean, Obama comes into this thing saying, We're going to work together. I can bring anybody around a table with me and I can convince them that the better-for-all is the better for the individual.

… For those who were less familiar with the compensation practices of Wall Street -- and not everybody knows about that sort of thing and the kind of granularity that became important -- yeah, they were surprised that after we saved their bacon, they ate our lunch. [laughter] It just seemed crazy.

To me, it was like, well, you know, that's what they do.

And did we lose an opportunity? Did we lose the leverage to use the power, that the banks were up against the ropes and they knew that we were saving their butts.

I think this line of critique has been overplayed. Yes, we lost an opportunity in the sense that we should have insisted on more lending back into the economy as a contingency on getting some of those bailout funds. But that's actually a relatively small part of the puzzle.

What we got was financial reform. And what we should insist on going forward as that reform is still being crafted and implemented, is that it be a very serious and real level of oversight. The lessons of the financial meltdown of 2007 and 2008, it's not clear yet whether they've been learned or not. It's like what is the Mao saying about the French Revolution? It's too soon to tell. [laughter]

It's a matter of whether we come out of this with a level of oversight that is strong enough to contain the inherent instability in these financial markets. And we're fighting tooth and nail around the implementation of Dodd-Frank on those very issues.

Let's talk about Dodd-Frank a little bit. Critics will say that the administration shouldn't have gone with healthcare reform, for instance. When they had the leverage, they should immediately have gone to reregulating Wall Street, to changing the system so that this could never happen again. What's your take on that?

My initial take on that is that we actually accomplished some measure of both. We managed to legislate national healthcare reform. It's not everything everyone wants it to be, I absolutely grant that. There's no public option that many people really cared a lot about for good reason. And financial reform doesn't go as far as lots of people would like it to.

But we've got big noses under both of those tents in ways that no one has heretofore, and how we build on them is really the issue.

… It seemed like for healthcare, for instance, that was handed over to the Congress. Was that the case with Dodd-Frank as well?

I think Dodd-Frank was much more interactive. There was lots of input from Treasury, and then [Sen. Chris] Dodd [D-Conn.] and [Rep.] Barney Frank [D-Mass.] and their committees ironed out lots of the details that ended up in the bill, many of which are still being worked out.

So for example, everyone agreed that we needed to have capital requirements. This was something that was very big for Secretary Geithner, that banks need to have a certain amount of capital on hand, in the vaults, against their liabilities. And yet, the amount of those capital reserves is still being argued about.

When you look at Dodd-Frank, what are the weaknesses, what are the strengths?

… I think the problem with Dodd-Frank is that we traded off getting this critically important legislation over the legislative finish line with not dotting all the Is and crossing all the Ts in terms of the devil-in-the-details part. And now many of those details, which are of great consequence to how well Dodd-Frank works are subject to all the pressures from the lobbies and the politicking that could undermine them.

A lot of people suggest that almost the banks knew that they didn't have to have a big lobbying effort during the actual passing of the bill because they knew they'd have several more bites of the apples.

I think that's right. The fact is that we're having arguments now about key components of Dodd-Frank, and those arguments are not taking place under the scrutiny of the press in the light of day, and the bank lobbyists are in there with big, fat thumbs on the scale. And that has the potential to very much weaken the legislation.

So what can the Obama administration do about that, especially with an election coming up?

The problem with the executive branch is always going to be that you kind of get things over the finish line and then you turn to the next thing.

So I think that this is largely a matter of Congress. To have Barney Frank in the mix is actually very important in getting a good, solid financial reform bill with real teeth. As he retires, that's a real concern. Now, if Elizabeth Warren can come in and play a role, that's going to help. … If both Houses go Republican, one could justifiably worry a lot about the consequences for Dodd-Frank and its ultimate implementation. …

Why does the president eventually go for the Volcker Rule? What's the background to that?

… I think in the Volcker Rule, the president just really heard that debate fully fleshed out, both sides, and he made the call. And I think he made the right call. But he really waded pretty deeply into those substantive waters and just made the right call himself.

And Geithner's point of view on it, that he thought it was pushing it too much, it wasn't necessary? Why?

… There are some arguments that it's actually very hard to tell what's the proprietary trading anyway, and what's a bank's book, and what's the book of its customers are not as clear as it used to be. I don't know, none of those arguments made a lot of sense to me.

The Volcker Rule, as Volcker and [Council of Economic Advisers Chair] Austan Goolsbee and others at the time were espousing, was actually a very clear way back to a level of division within commercial banks that made perfect sense to a lot of people, ultimately including the president.

… Was there ever a feeling in the White House that more could have been done PR-wise to maybe take a slap at the banks here and there a little bit more so it didn't look like you were in bed. Because it seems like the reputation has been gotten that the administration didn't slap back.

It's funny you should say that because I remember people from the business community arguing that we're way too harsh and critical of them.

I mean, once I went on TV, when I was working for the White House, and I was talking about credit card reform. I was really talking about how we needed to make this more transparent for people, and there were some deceptive practices. I got back to my office and my phone rang, and it was one of the most prominent bankers on Wall Street -- I won't name names -- just reaming me out and saying how this administration is so anti-business.

So I find it curious to hear from one side now that we were so much in bed with these folks. That's certainly not the way they felt.

You were always worried about a jobless recovery, it seems.

Yes.

You had a briefing in June '09 with the president about this issue. What was that briefing like? What were you trying to tell the president about and sort of what it tells us about the way he would view a subject as important as this?

Certainly, the subtext was, "Sir, you can see that GDP is starting to recover, and that's obviously a good thing. But don't think that that's necessarily going to lead to the kind of job growth we need, to bring the unemployment rate down, to give people the opportunities we all agree that they need."

Of course, the subtext there is, we're going to need to do more. We're going to need to build on some of the momentum that the Recovery Act is having. It's working on the GDP side, but it's going to take more to translate that into real job growth.

And did he worry about that?

Yes.

Did he talk about the political realities?

Yes. … He gets this, but he also has to get the constraints, the reality, the budget deficit argument that's out there, the difficult politics. I mean, he's got people who claim that their main goal in life is to make sure he doesn't get re-elected. He faces some pretty steep constraints.

You had front row seats to a very important part of our history. Describe how you saw this president changed, what he learned, how he learned things, and how he changed over the time that you worked for him.

I wish I could give you a more sexy answer, but I don't think he really has changed all that much. It may be because, at root he's basically just a very smart pragmatist. I think he has a great capacity to take in information and recognize the lay of the land and what's possible, what isn't.

So if he's changed, it's that he recognizes just how much more narrow the partisan politics of today's Washington have made his options. In December 2008, he was very reasonably thinking big and imagining ways in which this crisis could be an opportunity for even transformative economic policy on investments.

In 2012, with the level of partisan dysfunction, he's got to realize something else. But the core of the man, to me, I don't think he's changed all that much. …

Was it surprising that in the end there was this turnover on the economic team and in fact that Geithner is the one that still remains?

I don't think so. I mean, actually if you look at the tenure of most of us, it's just about average for this kind of a political appointee. And Tim actually might have a hard time getting a job out there, so he's probably just better off staying where he is. [laughter]

The president has a great relationship with Tim Geithner. … Tim is very good at serving, I think, the president what he needs to make the choices in front of him. So it's not surprising that he's still there.

"Plan beats no plan."

Yeah, right.

Did that happen quite a bit?

Yeah, I mean, I vividly remember Tim pulling some disparate meetings together, saying: "Look, in a half an hour we have to give the president some solid advice. And we can present different views to him, but that's what's going to have to happen in a half an hour. So let's get to work."

And I would imagine that that kind of a person is very helpful to you if you're the president. So it doesn't surprise me that Tim's still there.

I just want to run by you a couple things that Phil Angelidis said, the head of the Financial Crisis Inquiry Commission. He points to the fact that they made referrals to the DOJ about what they thought were illegal actions, fraud and ethical lapses. And he's concerned that nothing has happened to this point. …

With respect to Phil, who knows his stuff, I think that's another criticism that's been overplayed.

Unfortunately, it's not like any of these banks did anything illegal. It's that they did a lot of stuff that was patently wrong and completely screwed up the global economy in horrible ways. And all that stuff is legal, man.

The problem is a systemic one. When you actually get down to the very granular level of what broke down here, people were getting bank loans that they never should have gotten. And there just was hardly any fraud there. There was terrible underwriting. There was bad judgment. There was way underregulation. There was way too much trust in a system that would mythically police itself. …

The other point that he makes is that his worry is that there was no dramatic rethinking of the financial markets, that the changes were brought about by Dodd-Frank are too little, too late, that OTC derivatives are still unregulated, that transparency is still lacking.

What we need is not some sort of massive transformation of financial markets. I mean, I don't even know what that means. What we need is simple, common-sense stuff that would make sense to everybody. If you're a bank, you have to have enough capital on hand to support your activities in the markets, to support your leverage.

If you're giving somebody a loan, that loan can't be predicated on housing prices defying gravity forever. So we have rules about underwriting.

If you're an investor, you have to be able to see what's going on in the institutions. You can't have a shadow banking system that hides all that stuff.

That's not rocket science. People like Adam Smith have been trying to teach us that stuff for centuries, but economists hypnotize themselves into this notion that these institutions will police themselves, when in fact they're, of course, inherently unstable.

Are we on the right track now?

I very much worry that we haven't learned the lessons that this crash should have taught us. The hedge fund, MF Global, that went bankrupt a few weeks ago, was leveraged to the tune of something like 40-to-1. A typical leverage ratio should be more like 15-to-1. They were betting on discounted southern European debt. It's precisely the kind of speculation that got us into this mess.

The fact that that kind of thing can happen, sure, that makes me nervous that lessons have not been learned.

I will say that they went down and the system did not. We do have to have a system where firms and banks can fail. It's actually a good thing. But in an era of this level of interconnectedness, yeah, I worry, I worry that we haven't learned the lessons.

And lastly, the president is out there now campaigning for another term. … How does he have to define what you all accomplished to be re-elected?

I think he has to do what he's been doing, which is to explain to the electorate the contrast between his understanding of how the economy works and should work and that of his opponents.

His opponents -- and I say this because this is the platform of every Republican candidate so far -- are very much in the trickle-down, supply side, deregulatory mode that is precisely the playbook that got us into this mess. So number one is drawing that contrast.

I think number two is really reminding people where we were. It is true that people have very short memories in this town and in this country. But I think they do remember just how deep the great recession was, and how tough that was. And it's still tough out there, but there's no question that things are getting better. …

Anything else that you remember from your period of time working with the vice president and the president that you think it's important for people to understand in this whole process that you've lived through?

I was thinking about the Recovery Act. You were asking about sort of messaging and communicating. Why wasn't the Recovery Act more popular? We were doing a lot to help people, keep teachers in the classroom and stuff, keep construction workers building stuff. And you could imagine that that would have been more popular. …

One of the things that struck me … is the extent to which people were starting from a position of government must be a failure.

I saw this with the Recovery Act. If you came into a room to talk to journalists, for example, about the Recovery Act, the assumption was this must be a big boondoggle that isn't doing anything. Starting from that assumption, it's actually very difficult to explain to people how a program like that is working.

I think the notion of government failure is so embedded in American consciousness right now, that actually when it works, people don't believe it. … And this problem goes very deep into the system right now. It's quite nefarious, because there are many politicians out there who run on the platform that government is the problem, government can't get anything right, government is the mistake, government does everything wrong. And when you elect them, they work very hard to prove it to you.

And that's a dynamic that I think is actually really hurting this country right now. I saw it firsthand. When that kind of dysfunction is in the system, the system loses its ability to self-correct. And every system, whether it's a biological organism or a society, must be able to self-correct to appropriately diagnose and prescribe.

But when you have people running the show, who fundamentally disbelieve in the process of a role for government, especially in a complex, interconnected, global economy like ours, that's a very dangerous path to be going down.