WEBVTT 00:00:00.000 --> 00:00:03.000 Welcome to today's Deep Dive. We're absolutely 00:00:03.000 --> 00:00:04.980 thrilled to have you with us today. Yeah, really 00:00:04.980 --> 00:00:08.140 glad you're tuning in. So today our source material 00:00:08.140 --> 00:00:11.179 is this incredibly extensive, highly detailed 00:00:11.179 --> 00:00:13.699 Wikipedia article covering the Emergency Economic 00:00:13.699 --> 00:00:18.059 Stabilization Act of 2008. you probably know 00:00:18.059 --> 00:00:21.960 it by its much more infamous title, the $700 00:00:21.960 --> 00:00:25.260 billion bank bailout. Yeah, it is. I mean, it's 00:00:25.260 --> 00:00:27.579 a piece of legislation that completely altered 00:00:27.579 --> 00:00:29.679 the trajectory of the modern global economy. 00:00:29.920 --> 00:00:32.320 No exaggeration. Not at all. And our mission 00:00:32.320 --> 00:00:36.490 today is to look... way beyond those initial 00:00:36.490 --> 00:00:39.350 shocking headlines from the time. We're going 00:00:39.350 --> 00:00:43.070 to explore exactly how the US government orchestrated 00:00:43.070 --> 00:00:44.969 one of the largest financial interventions in 00:00:44.969 --> 00:00:47.429 human history. We'll get into the fierce, really 00:00:47.429 --> 00:00:51.109 bitter battle over its design and the massive 00:00:51.109 --> 00:00:53.450 unintended consequences that followed. It is 00:00:53.450 --> 00:00:55.609 fundamentally a story about what happens when 00:00:55.609 --> 00:00:58.130 the people in charge are told that the financial 00:00:58.130 --> 00:01:00.929 world is quite literally ending tomorrow. Right. 00:01:01.189 --> 00:01:03.149 Now, before we jump into the deep end here, we 00:01:03.149 --> 00:01:04.950 need to make a really important note for you, 00:01:05.010 --> 00:01:07.750 our listener. Yes, definitely. The source material 00:01:07.750 --> 00:01:10.969 we are covering today contains some highly politically 00:01:10.969 --> 00:01:14.909 charged reactions from both left -wing and right 00:01:14.909 --> 00:01:18.400 -wing figures. So we want to make it unequivocally 00:01:18.400 --> 00:01:21.159 clear from the jump that we are not taking any 00:01:21.159 --> 00:01:23.200 sides here. Right. Absolutely not. We are not 00:01:23.200 --> 00:01:26.480 endorsing any of the viewpoints or policies or 00:01:26.480 --> 00:01:28.939 political reactions presented in this text. We 00:01:28.939 --> 00:01:32.760 are simply acting as your impartial guides. Just 00:01:32.760 --> 00:01:35.459 reporting the facts. Exactly. Reporting on the 00:01:35.459 --> 00:01:38.439 ideas, the quotes, and the historical facts exactly 00:01:38.439 --> 00:01:40.879 as they are contained in the provided material. 00:01:41.180 --> 00:01:43.400 Yeah. Our goal is understanding, not judgment. 00:01:43.629 --> 00:01:46.810 We're just here to look at the mechanics of history, 00:01:46.810 --> 00:01:49.790 really. So to really understand what happened, 00:01:50.349 --> 00:01:52.629 you have to think about how federal law is usually 00:01:52.629 --> 00:01:55.450 made. Usually there's this expectation of deliberate, 00:01:56.849 --> 00:01:58.909 almost tedious architecture. Yeah, very slow. 00:01:59.090 --> 00:02:00.730 Right. It's like building a skyscraper. You have 00:02:00.730 --> 00:02:02.170 blueprints. You have endless committee meetings. 00:02:02.250 --> 00:02:05.150 You measure twice. You cut once. And every single 00:02:05.150 --> 00:02:08.169 rivet gets inspected by like a dozen different 00:02:08.169 --> 00:02:10.789 people. It's supposed to be a process defined 00:02:10.789 --> 00:02:15.129 by friction and, you know, slow, careful consideration. 00:02:15.550 --> 00:02:17.909 We like to imagine our legislation is thoroughly 00:02:17.909 --> 00:02:20.069 stress tested before it ever leaves the ground. 00:02:20.330 --> 00:02:23.530 But then you look at times of absolute existential 00:02:23.530 --> 00:02:27.669 panic and suddenly that careful construction 00:02:27.669 --> 00:02:30.229 process is completely abandoned. Oh, out the 00:02:30.229 --> 00:02:31.629 window. Right out the window. We aren't building 00:02:31.629 --> 00:02:34.370 a skyscraper anymore. We are desperately throwing 00:02:34.370 --> 00:02:36.719 sandbags that are bursting dam in the middle 00:02:36.719 --> 00:02:39.180 of a torrential flood just, you know, using whatever 00:02:39.180 --> 00:02:41.240 we can get our hands on. Yeah. And that brings 00:02:41.240 --> 00:02:44.360 us to September 2008. the global credit markets 00:02:44.360 --> 00:02:47.560 had essentially frozen solid, driven by this 00:02:47.560 --> 00:02:50.460 subprime mortgage crisis. Yeah, and to understand 00:02:50.460 --> 00:02:52.939 the sheer scale of the panic, you really have 00:02:52.939 --> 00:02:54.639 to look at the dominoes that were falling at 00:02:54.639 --> 00:02:56.960 the time. Lehman Brothers, I mean, an institution 00:02:56.960 --> 00:02:59.960 that had survived a century of wars and depressions. 00:03:00.060 --> 00:03:02.039 Literally a century. Yeah, and it essentially 00:03:02.039 --> 00:03:04.400 vanished overnight. And then you had the insurance 00:03:04.400 --> 00:03:07.280 giant AIG, which basically held the safety net 00:03:07.280 --> 00:03:09.280 for the rest of the entire financial system. 00:03:09.620 --> 00:03:12.150 And they were rapidly unraveling. The level of 00:03:12.150 --> 00:03:15.530 sheer terror, I mean, it just cannot be overstated. 00:03:16.169 --> 00:03:18.409 On September 18th, the chairman of the Federal 00:03:18.409 --> 00:03:21.530 Reserve, Ben Bernanke, sat down in this dramatic 00:03:21.530 --> 00:03:24.449 meeting with congressional leaders and he delivered 00:03:24.449 --> 00:03:27.310 a chilling warning. He reportedly told them, 00:03:27.810 --> 00:03:30.530 if we don't do this, we may not have an economy 00:03:30.530 --> 00:03:32.750 on Monday. Just, I mean, just think about the 00:03:32.750 --> 00:03:34.810 gravity of that statement being delivered to 00:03:34.810 --> 00:03:37.629 lawmakers. It's wild. We may not have an economy 00:03:37.629 --> 00:03:40.150 on Monday. That is the precipice they were standing 00:03:40.150 --> 00:03:42.969 on. And so the proposed solution came from Treasury 00:03:42.969 --> 00:03:46.810 Secretary Henry Paulson, who, always worth noting, 00:03:46.930 --> 00:03:49.770 was a former CEO of Goldman Sachs. Right. That's 00:03:49.770 --> 00:03:52.150 a key detail. He presented a proposal to Congress 00:03:52.150 --> 00:03:56.169 asking for $700 billion to buy up toxic mortgage 00:03:56.169 --> 00:03:58.770 -backed securities from these failing financial 00:03:58.770 --> 00:04:01.400 institutions. Right. Before we talk about the 00:04:01.400 --> 00:04:03.500 bill itself, we should probably clarify what 00:04:03.500 --> 00:04:06.000 made those assets so toxic in the first place. 00:04:06.099 --> 00:04:08.379 Yeah, good idea. So a mortgage -backed security 00:04:08.379 --> 00:04:10.860 is essentially thousands of individual home loans 00:04:10.860 --> 00:04:13.939 bundled together into one giant financial product, 00:04:14.099 --> 00:04:16.740 which is then, you know, sold to investors. Right. 00:04:16.819 --> 00:04:18.860 But the real problem was what they were putting 00:04:18.860 --> 00:04:22.100 inside those bundles. Precisely. During the housing 00:04:22.100 --> 00:04:25.069 boom, lenders started giving mortgages to people 00:04:25.069 --> 00:04:27.410 who couldn't realistically pay them back. The 00:04:27.410 --> 00:04:29.589 subprime loans. Exactly, the subprime loans. 00:04:30.310 --> 00:04:32.870 Wall Street took those bad loans, mixed them 00:04:32.870 --> 00:04:35.870 in with good loans, sliced them up, and sold 00:04:35.870 --> 00:04:38.629 them globally. Wow. So when the housing bubble 00:04:38.629 --> 00:04:41.050 burst and millions of people defaulted on their 00:04:41.050 --> 00:04:44.149 mortgages all at once, those bundled securities 00:04:44.149 --> 00:04:46.569 became incredibly toxic. Because they were full 00:04:46.569 --> 00:04:50.300 of defaults. Right. And worse, They became impossible 00:04:50.300 --> 00:04:53.540 to value because no one knew exactly how many 00:04:53.540 --> 00:04:56.259 bad loans were hiding inside any given bundle. 00:04:56.860 --> 00:04:58.839 And we have to talk about the physical nature 00:04:58.839 --> 00:05:02.240 of Paulson's proposal to fix this. I mentioned 00:05:02.240 --> 00:05:04.600 earlier how deliberate federal law usually is, 00:05:05.079 --> 00:05:08.160 right? Thousands of pages, endless debate. Oh, 00:05:08.300 --> 00:05:10.620 yeah. Paulson's proposal was three pages long. 00:05:11.019 --> 00:05:14.629 Three pages. to authorize the spending of $700 00:05:14.629 --> 00:05:17.449 billion. It's hard to wrap your head around. 00:05:17.810 --> 00:05:20.569 It was intentionally short on details to facilitate 00:05:20.569 --> 00:05:23.009 quick passage, but the price tag wasn't even 00:05:23.009 --> 00:05:25.689 the most controversial part. It was Section 8 00:05:25.689 --> 00:05:28.839 of the original draft. This section demanded 00:05:28.839 --> 00:05:31.100 unlimited power for the Secretary of the Treasury 00:05:31.100 --> 00:05:33.819 to spend this money, and it explicitly stated 00:05:33.819 --> 00:05:35.980 that these decisions could not be reviewed by 00:05:35.980 --> 00:05:38.600 any court of law or any administrative agency. 00:05:39.120 --> 00:05:41.180 Okay, let's unpack this. This is essentially 00:05:41.180 --> 00:05:43.860 like handing a teenager a blank check for a million 00:05:43.860 --> 00:05:47.220 dollars, letting them go to a casino, and legally 00:05:47.220 --> 00:05:49.279 banning yourself from ever checking their bank 00:05:49.279 --> 00:05:51.339 statement. Yeah, that's incredibly accurate. 00:05:51.639 --> 00:05:54.160 Absolute immunity from congressional or judicial 00:05:54.160 --> 00:05:56.779 review. It's staggering. What's fascinating here 00:05:56.779 --> 00:05:59.800 is the severe asymmetry of information involved 00:05:59.800 --> 00:06:02.379 in this proposed transaction. Investor George 00:06:02.379 --> 00:06:05.800 Soros strongly opposed this original plan, and 00:06:05.800 --> 00:06:08.839 he pointed out a classic economic problem. Which 00:06:08.839 --> 00:06:12.560 was? Well, because these complex toxic securities 00:06:12.560 --> 00:06:15.040 were so incredibly hard to value, the Treasury 00:06:15.040 --> 00:06:17.339 was at a massive disadvantage. Oh, I see. Yeah. 00:06:17.420 --> 00:06:19.220 The sellers, the banks who originally created 00:06:19.220 --> 00:06:22.100 these bundled assets, they knew exactly how toxic 00:06:22.100 --> 00:06:24.160 they were. So the banks have all the information. 00:06:24.410 --> 00:06:26.550 and the government is essentially flying blind. 00:06:27.120 --> 00:06:30.379 Exactly. Soros argued that in any auction process 00:06:30.379 --> 00:06:32.959 set up like this, the Treasury would almost certainly 00:06:32.959 --> 00:06:35.720 overpay and end up with the absolute dregs of 00:06:35.720 --> 00:06:38.620 the market. Yikes. The dregs. Yeah. It was a 00:06:38.620 --> 00:06:41.399 catch -22. Unless the government vastly overpaid 00:06:41.399 --> 00:06:43.439 for these junk assets, the banks wouldn't get 00:06:43.439 --> 00:06:45.220 the financial relief they needed to survive. 00:06:45.839 --> 00:06:48.279 But if the government did overpay, the tax bill 00:06:48.279 --> 00:06:50.819 was essentially being taken for a ride. And as 00:06:50.819 --> 00:06:52.899 you can imagine, because Paulson's three -page 00:06:52.899 --> 00:06:56.180 demand was so audacious and, you know... completely 00:06:56.180 --> 00:06:58.959 lacked any oversight mechanism, it immediately 00:06:58.959 --> 00:07:02.060 triggered a massive visceral revolt. Oh yeah. 00:07:02.180 --> 00:07:04.860 We are talking about a bipartisan uprising from 00:07:04.860 --> 00:07:07.120 both the general public and the academic world. 00:07:07.160 --> 00:07:09.959 The reaction was swift and it was furious. Protests 00:07:09.959 --> 00:07:12.180 literally erupted in over a hundred cities across 00:07:12.180 --> 00:07:14.579 the United States. Just to give you a sense of 00:07:14.579 --> 00:07:17.180 the sheer volume of outrage here, Senator Dianne 00:07:17.180 --> 00:07:19.939 Feinstein's office received nearly 40 ,000 contacts. 00:07:20.060 --> 00:07:25.589 Wow, 40 ,000? Yeah. Emails? calls, letters, overwhelmingly 00:07:25.589 --> 00:07:28.629 against the bailout. Senator Sherrod Brown reported 00:07:28.629 --> 00:07:31.110 getting 2 ,000 calls and emails in a single day, 00:07:31.889 --> 00:07:34.430 and he noted that roughly 95 % of them were fiercely 00:07:34.430 --> 00:07:37.579 opposed to the plan. It created incredibly strange 00:07:37.579 --> 00:07:40.100 political bedfellows, too. You had politicians 00:07:40.100 --> 00:07:42.779 from completely opposite ends of the political 00:07:42.779 --> 00:07:45.000 spectrum uniting against it. Right, like who? 00:07:45.180 --> 00:07:47.860 Well, liberal Senator Bernie Sanders and conservative 00:07:47.860 --> 00:07:50.339 Congressman Ron Paul, who, you know, agree on 00:07:50.339 --> 00:07:53.319 almost nothing, were both highly vocal critics 00:07:53.319 --> 00:07:55.839 of this blank check. And it wasn't just the public 00:07:55.839 --> 00:07:58.100 and the politicians reacting emotionally. The 00:07:58.100 --> 00:08:00.379 academic world sounded a very technical alarm. 00:08:00.600 --> 00:08:02.959 Yes, they did. Over 100 university economists 00:08:02.959 --> 00:08:05.079 signed an open letter to Congress warning of 00:08:05.079 --> 00:08:08.759 three fatal pitfalls in the plan. First, unfairness. 00:08:08.860 --> 00:08:10.660 It was a massive subsidy to investors at the 00:08:10.660 --> 00:08:14.399 taxpayers' expense. Second, ambiguity. The mission 00:08:14.399 --> 00:08:16.420 and the oversight of the entire program were 00:08:16.420 --> 00:08:18.279 completely unclear. Because it was only three 00:08:18.279 --> 00:08:21.139 pages. Exactly. And third, the damaging long 00:08:21.139 --> 00:08:23.259 -term effects of fundamentally weakening private 00:08:23.259 --> 00:08:25.959 capital markets, just to calm a short -term disruption. 00:08:26.170 --> 00:08:29.550 Right. And the economists were particularly terrified 00:08:29.550 --> 00:08:32.250 of a concept called moral hazard. Moral hazard. 00:08:32.269 --> 00:08:35.090 Right. If we look at the core tenets of capitalism, 00:08:35.429 --> 00:08:38.289 the rule is simple. Investors who take massive 00:08:38.289 --> 00:08:41.070 risks to earn massive profits must also bear 00:08:41.070 --> 00:08:44.129 the catastrophic losses when those risks go bad. 00:08:44.230 --> 00:08:47.490 Right. That risk of failure is the disciplinary 00:08:47.490 --> 00:08:49.809 mechanism of the free market. It's what stops 00:08:49.809 --> 00:08:52.570 banks from just gambling with our money every 00:08:52.570 --> 00:08:55.600 single day. Exactly. And the economists saw that 00:08:55.600 --> 00:08:57.960 this fundamental rule was being completely abandoned 00:08:57.960 --> 00:09:00.240 just to prevent a short -term disaster. Which 00:09:00.240 --> 00:09:02.519 naturally led to a scramble for alternatives. 00:09:03.019 --> 00:09:06.419 I mean, if not a $700 billion blank check to 00:09:06.419 --> 00:09:08.860 buy toxic trash, then what? Right. There were 00:09:08.860 --> 00:09:11.980 other ideas. Yeah. Senator Hillary Clinton suggested 00:09:11.980 --> 00:09:14.799 reviving something like the Homeowners Loan Corporation 00:09:14.799 --> 00:09:17.639 from the Great Depression era. This would basically 00:09:17.639 --> 00:09:19.840 be a program to help regular everyday people 00:09:19.840 --> 00:09:22.519 refinance their mortgages and freeze foreclosures. 00:09:22.740 --> 00:09:24.879 Instead of just bailing out the top. Right. Rather 00:09:24.879 --> 00:09:26.960 than just funneling money directly to Wall Street. 00:09:27.100 --> 00:09:30.220 And on the economic side, you had Nobel laureate 00:09:30.220 --> 00:09:32.820 Paul Krugman suggesting a completely different 00:09:32.820 --> 00:09:35.840 mechanism. Instead of buying up the bank's trash 00:09:35.840 --> 00:09:39.700 assets, which avoids that whole valuation nightmare 00:09:39.700 --> 00:09:43.120 Soros mentioned. Right. The dregs. Exactly. Krugman 00:09:43.120 --> 00:09:45.679 argued the government should just inject capital 00:09:45.679 --> 00:09:47.980 directly into the banks in exchange for equity, 00:09:48.279 --> 00:09:50.759 like preferred stock. OK. Basically, the pitch 00:09:50.759 --> 00:09:54.379 was if the taxpayer is saving you, the taxpayer 00:09:54.379 --> 00:09:56.690 owns a piece of you. Wait, hold on. I have to 00:09:56.690 --> 00:09:59.129 push back on that a little bit. If the government 00:09:59.129 --> 00:10:02.490 is suddenly buying equity in private banks Aren't 00:10:02.490 --> 00:10:04.909 we just talking about nationalizing the banking 00:10:04.909 --> 00:10:07.169 sector? Yeah. Why was that considered a better 00:10:07.169 --> 00:10:10.090 option? Well, that was exactly the fear of many 00:10:10.090 --> 00:10:12.870 lawmakers. But Krugman and others argued it was 00:10:12.870 --> 00:10:14.909 much cleaner. You don't have to figure out what 00:10:14.909 --> 00:10:17.450 a bundle of bad mortgages worth, which we establish 00:10:17.450 --> 00:10:19.389 is nearly impossible. Right. You just look at 00:10:19.389 --> 00:10:21.269 the stock. Exactly. You just look at the bank's 00:10:21.269 --> 00:10:23.769 stock price. More importantly, if the bank eventually 00:10:23.769 --> 00:10:26.309 recovers and becomes profitable again, the taxpayers 00:10:26.309 --> 00:10:29.070 actually share in that upside because they own 00:10:29.070 --> 00:10:32.210 the equity. That makes sense. Yeah. Under Paulson's 00:10:32.210 --> 00:10:34.490 plan, the overriding sentiment from the public 00:10:34.490 --> 00:10:37.090 was one of profound betrayal. Right, because 00:10:37.090 --> 00:10:39.409 we had a scenario where the people who set the 00:10:39.409 --> 00:10:42.309 financial house on fire were not only being handed 00:10:42.309 --> 00:10:44.750 the fire extinguishers, but the taxpayers were 00:10:44.750 --> 00:10:47.330 paying a premium for their time. Exactly. No 00:10:47.330 --> 00:10:49.629 wonder the public was furious. And this massive 00:10:49.629 --> 00:10:52.490 public and academic pressure actually worked, 00:10:52.929 --> 00:10:55.370 at least initially. Briefly, yeah. On September 00:10:55.370 --> 00:10:58.029 29th, the House of Representatives held a vote 00:10:58.029 --> 00:11:01.139 on the legislation. And it failed. It's fail. 00:11:01.340 --> 00:11:04.879 205 to 228. Congress actually listened to the 00:11:04.879 --> 00:11:07.779 phone calls and said no to the bailout. But the 00:11:07.779 --> 00:11:10.159 financial market's reaction to that no was utterly 00:11:10.159 --> 00:11:12.379 catastrophic. It was an absolute bloodbath. Yeah. 00:11:12.539 --> 00:11:15.360 The Dow Jones Industrial Average dropped 777 00:11:15.360 --> 00:11:18.320 points in a single day. At the time, that was 00:11:18.320 --> 00:11:20.620 its largest single day point drop in history, 00:11:21.039 --> 00:11:24.360 wiping out $1 .2 trillion in market value in 00:11:24.360 --> 00:11:28.070 a matter of hours. Gone. Oil saw its second largest 00:11:28.070 --> 00:11:30.669 one day drop ever. But perhaps the most terrifying 00:11:30.669 --> 00:11:33.210 metric to economists wasn't even the stock market. 00:11:33.490 --> 00:11:35.909 It was something called the TED spread. OK. For 00:11:35.909 --> 00:11:38.590 someone who doesn't work on Wall Street, what 00:11:38.590 --> 00:11:40.870 exactly is the TED spread and why did it matter 00:11:40.870 --> 00:11:44.289 so much? So the TED spread is essentially a measure 00:11:44.289 --> 00:11:46.850 of trust in the banking system. OK. It's the 00:11:46.850 --> 00:11:49.690 difference between the interest rate banks charge 00:11:49.690 --> 00:11:52.970 each other for a short term loan and the risk 00:11:52.970 --> 00:11:56.889 free rate. the treasury charges. Got it. Normally, 00:11:57.389 --> 00:11:59.590 banks lend money to each other all the time just 00:11:59.590 --> 00:12:01.009 to balance their books at the end of the day. 00:12:01.110 --> 00:12:03.669 It's routine. Right. But after the bailout vote 00:12:03.669 --> 00:12:07.929 failed, the TED spread hit a 26 -year high of 00:12:07.929 --> 00:12:12.600 3 .58%. Meaning what, practically speaking? Imagine 00:12:12.600 --> 00:12:15.039 your friend asks to borrow 20 bucks, but you 00:12:15.039 --> 00:12:16.980 know they just lost their job, their house is 00:12:16.980 --> 00:12:19.519 in foreclosure, and they owe money to five other 00:12:19.519 --> 00:12:21.159 people. I am definitely not lending them the 00:12:21.159 --> 00:12:23.000 20 bucks. Exactly. You're gonna lend them anything. 00:12:23.179 --> 00:12:26.100 That is what happened on a global multi -billion 00:12:26.100 --> 00:12:29.440 dollar scale. Banks were so terrified that their 00:12:29.440 --> 00:12:31.679 fellow banks were hiding toxic assets and were 00:12:31.679 --> 00:12:34.080 about to collapse that they simply stopped lending 00:12:34.080 --> 00:12:37.240 to each other entirely. The day -to -day financial 00:12:37.240 --> 00:12:40.049 plumbing of the world completely choked. And 00:12:40.049 --> 00:12:43.490 that sheer numerical panic forced the Senate's 00:12:43.490 --> 00:12:47.129 hand. Two days later, on October 1st, they passed 00:12:47.129 --> 00:12:49.570 a heavily revised version of the bill. They had 00:12:49.570 --> 00:12:52.389 to do something. Right. But here's where it gets 00:12:52.389 --> 00:12:55.350 really interesting. That original arrogant three 00:12:55.350 --> 00:12:59.169 -page bill, it magically ballooned into 451 pages. 00:12:59.389 --> 00:13:02.750 Yeah, quite the leap from three pages. Why? Because 00:13:02.750 --> 00:13:06.570 the Senate added $150 billion in legislative 00:13:06.570 --> 00:13:09.750 sweeteners to bribe hesitant lawmakers into voting 00:13:09.750 --> 00:13:12.730 yes. It was a master class in legislative brute 00:13:12.730 --> 00:13:15.169 force. It's basically like a hostage negotiation. 00:13:15.929 --> 00:13:18.289 So to get Congress to swallow this bitter medicine, 00:13:18.750 --> 00:13:20.409 the Senate essentially took the broccoli of the 00:13:20.409 --> 00:13:23.710 bailout and buried it under $150 billion worth 00:13:23.710 --> 00:13:25.600 of legislative ice cream. That's a great way 00:13:25.600 --> 00:13:27.779 to put it. Tax extenders and pork just to get 00:13:27.779 --> 00:13:30.039 the votes. We are talking about tax provisions, 00:13:30.399 --> 00:13:32.740 renewable energy credits and alternative minimum 00:13:32.740 --> 00:13:35.940 tax relief. And it worked. Yep. The House passed 00:13:35.940 --> 00:13:38.460 the revised bill on October 3rd and President 00:13:38.460 --> 00:13:41.299 Bush signed it into law within hours. If we connect 00:13:41.299 --> 00:13:43.559 this to the bigger picture, this sequence of 00:13:43.559 --> 00:13:46.100 events perfectly illustrates the raw reality 00:13:46.100 --> 00:13:49.200 of crisis governance. There is a revealing memory 00:13:49.200 --> 00:13:52.019 from former Senator Evan Bay about this exact 00:13:52.019 --> 00:13:55.019 moment. Oh yeah. Yeah. He described the scene 00:13:55.019 --> 00:13:57.799 where Ben Bernanke warned them the sky was falling. 00:13:58.480 --> 00:14:00.360 Bayer called that they just looked at each other 00:14:00.360 --> 00:14:02.809 and said, What do we need to do to pass this? 00:14:02.809 --> 00:14:05.870 Wow. It wasn't about debating perfect economic 00:14:05.870 --> 00:14:08.470 policy anymore. It was about doing whatever it 00:14:08.470 --> 00:14:11.090 took to stop the bleeding, even if it meant attaching 00:14:11.090 --> 00:14:14.909 $150 billion of completely unrelated tax extenders 00:14:14.909 --> 00:14:19.409 to a rescue package. So the bloated 451 page 00:14:19.409 --> 00:14:22.330 Emergency Economic Stabilization Act is signed 00:14:22.330 --> 00:14:24.649 into law. Now we have to look at the fine print. 00:14:24.649 --> 00:14:28.389 Let's get into it. What did those 451 pages actually 00:14:28.389 --> 00:14:30.980 do to the financial system? because the reality 00:14:30.980 --> 00:14:33.519 of how this money was used differed wildly from 00:14:33.519 --> 00:14:35.620 that original three -page sales pitch. Right. 00:14:35.919 --> 00:14:37.740 First and foremost, treasuries didn't get their 00:14:37.740 --> 00:14:40.820 blank check. The $700 billion was released in 00:14:40.820 --> 00:14:43.899 cautious trunches or installments. OK, so it 00:14:43.899 --> 00:14:46.559 wasn't all at once. Exactly. $250 billion initially, 00:14:46.659 --> 00:14:49.299 then $100 billion, and a final $350 billion that 00:14:49.299 --> 00:14:51.340 was actually subject to a congressional veto. 00:14:51.740 --> 00:14:54.200 They also added some much -needed oversight, 00:14:54.720 --> 00:14:57.179 completely reversing Paulson's demand for absolute 00:14:57.179 --> 00:14:59.580 immunity. They established a Congressional Oversight 00:14:59.580 --> 00:15:03.279 Panel, a Special Inspector General, and explicitly 00:15:03.279 --> 00:15:06.000 made the Treasury's actions subject to judicial 00:15:06.000 --> 00:15:08.909 review. And to stop regular people from pulling 00:15:08.909 --> 00:15:10.889 their money out of their local checking accounts 00:15:10.889 --> 00:15:14.330 in a panic, they also bumped up FDIC insurance. 00:15:14.649 --> 00:15:16.250 Right. That's the amount of your bank deposits 00:15:16.250 --> 00:15:18.470 guaranteed by the government. Exactly. They bumped 00:15:18.470 --> 00:15:22.649 that up from $100 ,000 to $250 ,000. But then 00:15:22.649 --> 00:15:24.710 we get to the restrictions on the banks themselves, 00:15:25.230 --> 00:15:27.629 specifically regarding executive pay. Oh, this 00:15:27.629 --> 00:15:30.259 is a big one. Yeah. Limits were introduced for 00:15:30.259 --> 00:15:33.320 the top five executives of participating firms, 00:15:33.940 --> 00:15:36.159 supposedly preventing incentives that encourage 00:15:36.159 --> 00:15:39.299 unnecessary and excessive risks. Supposedly? 00:15:39.679 --> 00:15:41.360 Right, but these limits were full of massive 00:15:41.360 --> 00:15:44.159 loopholes. There were no hard salary caps whatsoever. 00:15:44.580 --> 00:15:48.240 And most glaringly, existing golden parachutes, 00:15:48.779 --> 00:15:51.419 those massive multi -million dollar severance 00:15:51.419 --> 00:15:53.980 packages executives get, even if they run their 00:15:53.980 --> 00:15:57.179 company into the ground, those were left completely 00:15:57.179 --> 00:15:59.960 untouched. Which brings us to perhaps the most 00:15:59.960 --> 00:16:02.980 bizarre unintended consequence of the entire 00:16:02.980 --> 00:16:06.480 law. Section 128. Oh, man. This part is truly 00:16:06.480 --> 00:16:09.279 mind boggling. Walk us through it. OK. So Section 00:16:09.279 --> 00:16:12.340 128 allowed the Federal Reserve to begin paying 00:16:12.340 --> 00:16:14.940 banks a high interest rate on the deposit reserves 00:16:14.940 --> 00:16:17.519 they held at the Fed. OK. Now, let's remember 00:16:17.519 --> 00:16:19.480 the stated goal of the whole bailout. It was 00:16:19.480 --> 00:16:21.580 to unfreeze the credit markets, right? Right. 00:16:21.799 --> 00:16:24.860 To get banks lending to businesses, to families, 00:16:24.940 --> 00:16:27.200 to get the economy moving again. That was the 00:16:27.210 --> 00:16:30.269 entire justification for the $700 billion. But 00:16:30.269 --> 00:16:32.789 because of Section 128, instead of lending that 00:16:32.789 --> 00:16:35.110 money out to Main Street, where there is always 00:16:35.110 --> 00:16:37.129 an inherent risk that a borrower might default 00:16:37.129 --> 00:16:39.210 banks, realize they could just hoard their cash 00:16:39.210 --> 00:16:40.990 at the Federal Reserve and earn a risk -free 00:16:40.990 --> 00:16:43.049 interest paid by the government. That is just 00:16:43.049 --> 00:16:45.889 wild. The numbers are staggering. Bank deposits 00:16:45.889 --> 00:16:48.470 at the Fed jumped from roughly $10 billion at 00:16:48.470 --> 00:16:53.429 the end of August 2008 to $880 billion by January 00:16:53.429 --> 00:16:56.909 2009. I have to stop and ask, if the entire stated 00:16:56.909 --> 00:16:59.110 purpose of this multi -billion dollar rescue 00:16:59.110 --> 00:17:02.070 was to unfreeze the credit markets and get banks 00:17:02.070 --> 00:17:04.970 lending to everyday businesses again. Yeah, why 00:17:04.970 --> 00:17:08.769 on earth did Section 128 literally pay banks 00:17:08.769 --> 00:17:11.670 to sit on their cash? This raises an important 00:17:11.670 --> 00:17:14.250 question about the massive gap between legislative 00:17:14.250 --> 00:17:17.049 intent and structural execution. Seriously. The 00:17:17.049 --> 00:17:20.049 New York Times actually reviewed investor presentations 00:17:20.049 --> 00:17:22.930 from dozens of banks shortly after the bailout. 00:17:23.029 --> 00:17:25.750 What did they find? They found that very few 00:17:25.750 --> 00:17:28.650 banks cited lending to the public as a priority. 00:17:28.670 --> 00:17:31.609 Of course not. Instead, an overwhelming majority 00:17:31.609 --> 00:17:34.869 viewed the bailout money as a no -strings -attached 00:17:34.869 --> 00:17:37.390 windfall that they used to pay down their own 00:17:37.390 --> 00:17:40.279 debt, acquire other struggling businesses, or 00:17:40.279 --> 00:17:42.539 just invest for their own future. So they essentially 00:17:42.539 --> 00:17:45.220 use taxpayer rescue money to buy up their competitors 00:17:45.220 --> 00:17:47.740 and consolidate their own power. Exactly. Now, 00:17:47.740 --> 00:17:50.119 to be fair to the raw counting, the Troubled 00:17:50.119 --> 00:17:52.660 Asset Relief Program, or TARP as it was called, 00:17:52.980 --> 00:17:54.880 it ultimately recovered its money. Oh, it did. 00:17:54.980 --> 00:17:59.039 Yeah. Out of $426 .4 billion invested, the government 00:17:59.039 --> 00:18:03.180 recovered $441 .7 billion, which is a nominal 00:18:03.180 --> 00:18:06.660 profit of $15 .3 billion. Okay, so they made 00:18:06.660 --> 00:18:09.000 a profit. Well, though, when you adjust that 00:18:09.000 --> 00:18:11.740 for inflation over time, that might actually 00:18:11.740 --> 00:18:14.779 represent a loss. But strictly speaking, the 00:18:14.779 --> 00:18:17.700 dollars came back. But at what cost to the original 00:18:17.700 --> 00:18:19.859 promise made to the public? That is the ultimate 00:18:19.859 --> 00:18:23.549 crux of it. The intervention. absolutely succeeded 00:18:23.549 --> 00:18:26.430 in saving the institutions. It stopped the global 00:18:26.430 --> 00:18:28.789 economy from collapsing on that fateful Monday. 00:18:29.509 --> 00:18:32.069 But it failed in its secondary promise of forcing 00:18:32.069 --> 00:18:34.890 those saved institutions to act in the public's 00:18:34.890 --> 00:18:37.970 best economic interest. It was a massive structural 00:18:37.970 --> 00:18:40.609 flaw. The government successfully saved the banks, 00:18:40.849 --> 00:18:42.650 but they couldn't find a way to force the banks 00:18:42.650 --> 00:18:45.240 to save Main Street. So what does this all mean? 00:18:45.480 --> 00:18:47.740 For you listening right now, understanding the 00:18:47.740 --> 00:18:51.420 2008 bailout isn't just a dry history lesson 00:18:51.420 --> 00:18:53.640 about mortgage -backed securities and congressional 00:18:53.640 --> 00:18:55.960 votes. No, it's highly relevant today. It is 00:18:55.960 --> 00:18:58.920 a vital living blueprint for how modern governments 00:18:58.920 --> 00:19:02.599 behave in a moment of total blinding panic. The 00:19:02.599 --> 00:19:05.180 rules of finance, the boundaries of executive 00:19:05.180 --> 00:19:07.799 pay, the mechanisms of market stability that 00:19:07.799 --> 00:19:10.349 quietly govern your life today. They weren't 00:19:10.349 --> 00:19:11.970 carefully debated over years in the committee 00:19:11.970 --> 00:19:14.150 room. Not at all. They were forged in a weekend 00:19:14.150 --> 00:19:17.250 of sheer terror, heavily patched with loopholes, 00:19:17.450 --> 00:19:20.750 and wrapped in 451 pages of political compromise. 00:19:21.150 --> 00:19:23.950 It reveals exactly what happens when the fear 00:19:23.950 --> 00:19:26.250 of doing nothing suddenly outweighs the fear 00:19:26.250 --> 00:19:28.789 of doing something deeply flawed. And that leaves 00:19:28.789 --> 00:19:30.650 us with a final thought to ponder, something 00:19:30.650 --> 00:19:33.450 to explore on your own long after this deep dive 00:19:33.450 --> 00:19:37.180 ends. We just saw how a three -page memo, driven 00:19:37.180 --> 00:19:39.779 by the fear of imminent collapse, successfully 00:19:39.779 --> 00:19:43.000 initiated the mobilization of $700 billion in 00:19:43.000 --> 00:19:45.559 a matter of days to save the financial sector. 00:19:46.500 --> 00:19:48.880 What does that say about our society's capacity 00:19:48.880 --> 00:19:52.619 to fund other massive systemic crises, like crumbling 00:19:52.619 --> 00:19:55.000 healthcare infrastructure or the looming existential 00:19:55.000 --> 00:19:56.680 threat of climate change? That's a really good 00:19:56.680 --> 00:19:58.819 point. The money, the legislative force, the 00:19:58.819 --> 00:20:01.309 speed, it's all clearly there. But it makes you 00:20:01.309 --> 00:20:03.289 wonder what it would actually take for the political 00:20:03.289 --> 00:20:05.650 establishment to ever feel the exact same level 00:20:05.650 --> 00:20:08.670 of immediate terrifying panic about anything 00:20:08.670 --> 00:20:10.329 other than the stock market. It's ultimately 00:20:10.329 --> 00:20:12.710 a question of what we as a society define as 00:20:12.710 --> 00:20:15.609 a true emergency. We started today talking about 00:20:15.609 --> 00:20:18.230 desperately patching a bursting dam in the middle 00:20:18.230 --> 00:20:21.369 of a flood. The Emergency Economic Stabilization 00:20:21.369 --> 00:20:24.220 Act definitely stopped the water. The dam held, 00:20:24.359 --> 00:20:27.019 but when the water finally receded, we were left 00:20:27.019 --> 00:20:29.480 looking at a structure that was permanently changed, 00:20:30.019 --> 00:20:31.859 patched together with blank checks and political 00:20:31.859 --> 00:20:34.640 favors, standing as a monument to the day the 00:20:34.640 --> 00:20:37.180 architects panicked. Thanks for taking this deep 00:20:37.180 --> 00:20:38.660 dive with us. We'll see you next time.