The horizon is not so far as we can see, but as far as we can imagine

The Bailouts Caused the Shitty Economy, Part 2

Back in 2013, I wrote an article making the argument that bailouts were responsible for the bad economy.

The reason the economy has not recovered and will not recover for at least a generation is because of the overhang of bad debt, the glorification of financial “profits” (they aren’t), the failure to de-financialize the economy, and the confirmed control of government by the rich.

There is also a section on alternatives to the what we did. “We should do something,” is not the same as, “We must do what we did.”

But, be clear, the economy would be better now if we had not done anything. Yes, the immediate two years after the financial collapse would have been worse, but we’d be better off now than we are.

I think we need to note, first, where we are.

  • We are about to go into worldwide recession. In other words, the good part of this business cycle is mostly over. In many countries, it has been over for some time.
  • Peak to peak—from the peak of the last recovery to the peak of this recovery, the employment to population ratio has not recovered. It didn’t recover in Bush’s economy either, by the way.
  • Median incomes in the US have dropped. This is true in a number of other countries.
  • All of the gains of the recovery went to somewhere between the top 3 percent to top 5 percent. And really, that means the top 1 percent, .1 percent, and so on.
  • The rich are now richer than they were before the crash.
  • China is has hit the mercantile wall. After the financial collapse, they were the engine of global demand. But with so many of their customers in austerity, this could not be maintained.

In other words, the economy never actually recovered. You can argue it did, dishonestly, by looking at stats like unemployment (which don’t consider people who have given up looking for jobs), or GDP, but for most people, this is a shit economy, at best.

It has, however, been a good economy to be rich in.

Now, as I’ve been writing about what Capitalism is this last week, I think it’s worth noting something very fundamental.

The 2000’s economy was sick. It was doing the WRONG THINGS. It was doing them with trillions of dollars. Derivatives such as CDOs, vast expansion of borrowing for stock buybacks, the housing bubble, and so on.

It was doing things which had negative real returns–even measured in money. That these actions had negative, real returns was revealed in the financial collapse when those derivatives were worth ten cents or less on the dollar, and by the fact that central banks and governments had to spend trillions on the bail out.

Measured in human welfare, the mal-investment was worse. When you measure this in “opportunity cost,” meaning what we could have done with those resources instead, which would have increased human welfare, the cost was beyond vast: There are no words.

Capitalism is a system where markets make the primary economic investment decisions through price signals and the availability of money (these are not always identical, which is why I separate them).

More to the point, markets say, “If you are making money, do more of what you are doing.” The assumption is that if you’re making money, other people want what you’re doing, and that what people want is what has the most social utility—the greatest welfare for the buck.

I trust it is obvious to anyone but those brainwashed by the cult of economic utility that, in the 2000’s, the individuals who were making the most money were not creating welfare. They were, instead, reducing human welfare, absolutely and relative to other options.

The other case for capitalism and markets is that they are supposed to be self-correcting. People may make money doing the wrong thing due to market failures, but eventually they will lose that money.

They did.

I repeat, they did. The people making the wrong decisions lost all their money. They lost more than all their money.

We have a shitty economy now because we bailed them out. They then went back to doing all the wrong things, but with a huge debt overhang and more power.

What we needed was new economic decision makers. We needed the people who had all that money to lose their money and thus their political power, making it possible for a different set of people to make money.

Those people would have started off with a lot less money, and a lot less power, and that means there would have been a lot less money in politics, which would have fixed a swathe of problems political, social, and economic.

All that was required for this to happen was to DO NOTHING. Let the banks and brokerages and so on go out of business, and allow the process of law to proceed. The laws on the books at the time made most of what bankers and shadow bankers and various other decision makers doing illegal. Rather than allowing them to pay fines to indemnify themselves against law breaking, actually apply the law. Start with RICO statutes (conspiracy), grab their emails, and prosecute for fraud. (They were, essentially, all engaged in some fraud or another, though I don’t have time to go into that in this piece).

As an additional slice, all their remaining assets would have been seized as proceeds of crime, and they would have had to rely on public defenders.

This is what happens if you just follow the laws and regulations on the books. No special action is needed. None. Except to ensure laws are actually followed, I guess. That it requires special action for rich people to be subject to the law, is, however, part of the point.

So, we have a shitty economy now because we did not get rid of the people making terrible decisions who caused the financial collapse. We have a shitty economy because of the bailouts.

I went into personal decline in 2009 because I recognized that a watershed opportunity had been missed. It was our last chance to get off the train to Hell, really. Oh, we’ll get off that train one day, but we’ll already be in Hell.

The bailouts caused this shitty economy.

Much of what happened was a case of Obama’s decision making, either through action or inaction. TARP passed because he pushed it, for example. Bankers were not properly prosecuted because his DOJ chose not to do so. Many consider the actions of the Fed beyond his purview, but they are wrong.

The full argument is in my pieces “What Can Obama Really Do?” written in 2010, and “Could Obama Have Fixed the Economy?” written in 2014, though I also wrote an absurd number of pieces at Firedoglake on specific policy in real-time. I know for a fact that those articles reached the White House (though I don’t know if Obama ever read them). I know they were included in Dodd’s briefings.

Many other people were writing good proposals at the time as well. People more famous than I. The ideas were available.

So, I once said I don’t hate Clinton. I don’t hate Obama any more, but I did for a long time. He had a historic opportunity to be the next FDR. He deliberately chose not to be, and to instead help and defend the people who caused the financial crisis.

Obama triumphalists who go on about what a great president he is are either misinformed or cockroaches. The true cost of anything is the opportunity cost, and Obama’s opportunity cost is beyond large. Everything he could have done, and did not even try to do.

This is a bad economy, in terms of the numbers that matter to ordinary people. Less have work, and those who do make less money. It is about to get worse. Obama, and yes, Bernanke at the Fed, and Tim Geithner, and various other central bankers and politicians (including, yes, Bush), are responsible for how bad this economy is.

I will add that the most logical, good stimulus, would have been a massive energy project, in which America’s buildings were all retrofitted to be at least energy neutral. It would have directly put to work the people who needed that work, it could not be offshored, with some fairly simple policy, it could have created a solar manufacturing industry in America, and so on.

This means that some of the losses of climate change will also be Obama’s responsibility. Opportunity cost, again.


The Obama presidency will go down as a huge failure to historians looking back in even 20 years. The larger point is this: Capitalism does have some virtues, and one of them is wiping out people who are doing the wrong thing. That doesn’t mean that “all bailouts” were a bad idea, but bailouts of the people who caused the crisis (bankers, shadow bankers) were. The primary bailouts caused the lousy economy.

There will be another crisis. Learn the lesson of the last one. If we don’t, well, crises will continue until we do.

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  1. JeffR

    “The rich are now richer than they were after the crash.”

    Should be “before”?

  2. Rd.

    Not to defend Obama… however, your comparison to FDR seems a bit unbalanced.

    FDR was no heart bleeding liberal, but if I understand it correctly when he came to office, there were active demonstrations all over, which would have ‘encouraged’ FDR to change course from not doing anything as he was originally. I don’t recall any demonstrations when Obama took office! Perhaps as the chief narcissist, he gathered if the people are not there to support, why bother? (though his decision).

    The American people generally are way on the left field in the lala land, unfortunately. This robber baron oligarchy has managed to mesmerize the public to focus on their entertainment at the cost of their own good and well being…. truly sad.

  3. Rd.

    (sorry missed the last part).

    So unfortunately I don’t see anyone changing the ‘regime’ in DC so long as the public is dis-engaged. Even the phenomenon of Bernie or Donald with the so fragmented public would likely be more damaging than beneficial.

  4. Ian Welsh

    FDR did not originally intend to do nothing.

  5. Ian Welsh


    thank you.

  6. brian

    You should write about the negative interest rates in Japan. There are already negative interest rates in Switzerland and Denmark. If you don’t play the stock market game, the government will tax you. This clearly sends the signal that the governments will have the elites back (the people who have money in the stock market) no matter what. I wonder what happens after that game is over and all the money is sucked into the stock market game. It’s disastrous that the Western World views the stock market as the main and almost only indicator of financial success of their economies. They will back it until the rest of the economy runs dry.

  7. Bruce Wilder

    By 2005, it was objectively obvious that a crash was coming. You can go to the archives of Calculated Risk if you need documentation.

    You make the point that the Bush II economy was focused on doing wrong and unproductive things, which you and others had been pointing out for several years prior to 2005.

    Elites were getting ready. Not just planning the big short. Revising the bankruptcy laws to eliminate the possibility that home owners would be able to put toxic mortgages back on the banks without losing everything. Hiring Ben Bernanke, a specialist in how to do a Great Depression II without reform and restructuring of the economy.

    And, denying the obvious. If you go back to CR in 2005, one striking feature of the discourse is how much denial is flooding forth. Look at what Janet Yellin was saying, for example; she was either clueless or lying — probably both!

    Although the myth of the capitalist, market economy is that the system is self-correcting, the myth is a lie convenient to the powers that be. The system is managed — has to be managed — and the only political questions are by and for whom.

    That the system was being badly managed from the moment the housing bubble began to form, driven by hucksters at some giant savings and loans, was clear. Deregulating the financial sector step-by-step since Reagan has been a systematic, architectural choice. So when I write, “badly managed” I mean skillfully managed by and for bad people, and for more than 30 years.

    Denial has been the essential helpmate in this subversion of democracy. The myth of the market economy is part of the framework of denial. Academic economics is deliberately clueless, and the discourse guided by “market economy” hides the rabbit in the hat.

  8. Ian Welsh


    yes, I suppose I should. So many articles to write…


    yes. I predicted the crash myself.

  9. Hell's Bells

    So unfortunately I don’t see anyone changing the ‘regime’ in DC so long as the public is dis-engaged.

    Calls den0uncing the bailout crashed the Congressional switchboard. The public can’t “engage” if the politicians don’t give a flying **** what the public wants.

  10. Bill Hicks

    Regarding your comment about not hating Obama anymore–all I have to do is think back to election day 2008 when there were crowds of young people hanging out on street corners where I used to work (Arlington, VA) waving hand made Obama signs at every car that passed. They were laughing and cheering and no doubt looking forward to seeing America start to regain its senses after eight nightmarish years so they could have a future. Instead, they got eight MORE nightmarish years with many more to come, and have been completely robbed of that future.

    So yeah, I still hate Obama–even more than I hate Bush who was at least honest about being a complete sociopath.

  11. reslez

    Crowds of people came out to cheer for Obama everywhere he went. That’s why he became president. The moment he was in power he disbanded OfA, his grass roots organization. The people were dirt to him. What he really wanted was Wall Street’s money and adulation. When Occupy took center stage in 2011 with hundreds of encampments across the country, Obama’s Homeland Security coordinated multi-city attacks with local police to close them down. Under Bush, torture, surveillance and drone attacks were outrages. Obama made them routine. I’m not certain which of the two is the worst President in living memory, but it’s a rather chilling debate for those of us who live in the world they helped create. Obama is certainly worse in terms of sheer betrayal.

    As we watch Trump and Clinton march toward coronation I wonder if the US can take another 8 years of Bush/Obama policy. Surely something will explode before then.

  12. ProNewerDeal


    Who has been a worse President, Bush43 or 0bama, in terms of their policies’ impact on life on USian people?

    Perhaps a better question is to score the Presidents from Reagan to 0bama, in terms of quintiles (worst quintile, moderately bad quintile, median, moderately good, best quintile) based on the 44 Presidents in US history. I feel as though 0bama is even worse than Bush43. On the other hand, I wonder if this reflects my coming to greater understanding of the US political economy since 2009, specifically the horribleness of the Reaganesque neoliberal DLC Clinton/0bama Ds (thanks in large part to great sites like ianwelsh, nakedcapitalism, firedoglake), & that all the Presidents since Reagan are Reagan clones, whose performance varies only in degree of horribleness.

  13. highrpm

    in 2008, 58 year old white professionl, a lifelong republican, i voted for obama with the same dreamy positive expectation the youngsters with the handmade signs had. my last involvement with this democracy. ian, thanks for your clear and concise words about obama’s opportunity cost. the country’s politics has been taken over by hollywood and is now entertainment spectacle to butt sitting t.v. watching lowlife underedcated immigs.

    the only sense i make of life now is hitler was onto something with the na so party.

  14. amspirnational

    I’m not sure every instance you said or alluded to your belief that Obama was a bad man you also indicated you hated him, but I would like to point out your belief he was essentially bad had more to do with his amoral drone bombing and similar war making conduct than it did his bankster-friendly economic policies.
    I also would associate any personal periodic hate for the man with his sanctioned violence rather than bad economics.

  15. Ian Welsh


    Obama is President Bush in every way that matters. Obama institutionaized Bush. Eternal War on Terror, Drone Killings, same essential financial economy, exective over-reach. He is worse on civil liberties than Bush according to the ACLU (and I agree.) He deports more Hispanics. He kills more people with drones, etc… He’s done some good things domestically (food stamp rule changes, for example), but there isn’t a great deal of difference.


    economics kills people, impoverishes them, makes them lose their homes. Poverty is related to domestic violence, other types of crime and so on. I tend to be of the school that says unecessary suffering is bad no matter the cause.

  16. chris

    Brilliant piece on something right under our nose: the idea that the socialized debt is equal to the privatized profit, and that capitalism is not the same as democracy. just watch the first two minutes and you’ll be hooked:

  17. Barry Fay

    Ian – I don´t know if it is your past hatred of Obama (I still do!) or what, but laying TARP at Obama´s feet is just plain wrong. George Bush signed TARP into law in 2008. Just sayin…..

  18. Ian Welsh

    Dear Barry,

    it was my job to watch this stuff in real time back then. Here’s how it went down:

    TARP didn’t pass originally. Nancy Pelosi said she would not pass it unless and equal percentage of Republicans agreed to support it, they would not do so. TARP was dead.

    Then Obama went and twisted arms, quite viciously by the reports I heard, and got the Democrats to pass it, because he was the “leader” of the party.

    Yes, Obama is responsible for TARP. He is not the only responsible party, but it was DEAD when he resurrected it.

  19. Bill Hicks, it wasn’t Dubya who was the psychopath in that administration. If anyone was, it was Cheney, who also may have had psychotic episodes. Dubya was just more than a bit thick.

  20. Ian, you left out that poverty lowers your life span by causing your health to deteriorate. Poverty is terrible by any reasonable measurement.

  21. ProNewerDeal, those following Reagan could be said to be worse than Reagan was. Although his rhetoric was terrible, his fiscal policies were not. He spent more than they did. Clinton, to his shame, produced a government surplus, which means, in terms of the sectoral balances, that the private sector went into deficit. Clinton screwed everyone but the rich. And Hilary may not be much better, though undoubtedly better than any of the Republicans, all of whom seem to be against SocSec and like programs.

  22. I should also have mentioned that Clinton finished the deregulation of the banks, which led to the GFC.

  23. charlie

    In 2008, I tapped the tile on Obama with trepidation. Even before, I had a good hunch that America was a plutocrats masquerading as a democracy, but 2008 was definitely its last hurrah. I’m not hopeful for this time around the barn either. I am kind of secretly wishing that Trump is the American version of Putin, but that may even be hoping for too much. Last time I participate in that sham.

  24. Ian, you are right about some things, namely that we have still not fully recovered our pre-2008 standards of living, and that the rich are getting richer and are in control of the economy, but wrong about others.

    The fault for the crash lies with incompetent regulation on both sides of the pond. The banks themselves did not break the law (at least not in this regard). They made very bad commercial judgements, yes, but their shareholders paid a heavy price for that.

    You are however wrong to say that the bank bail-outs and debt overhang is the cause of following recession. The bad debts rung up by the bailed-out banks have now been fully written off and recapitalised by quantitative easing. It was the collapse of Lehman Bros. and the haircutting of Greek sovereign debt that caused contagion in the system, and the remaining banks to pull in their horns and stop lending to business. This was exacerbated by premature tightening of regulations, the austerity programme in the Eurozone and high levels of immigration resulting in wage compression and falling productivity. If you look carefully at the productivity figures for the UK you will see that the fall started in 2004 when the immigration floodgates were opened, not 2008, and although consumer borrowing levels have now largely recovered, productivity and standards of living have not. And the control of the economy by the rich is down to political funding in the US and EU and Westminster lobbying in Europe. That’s why we have a shitty recovery, and one of the many reasons why the UK must get out of the EU.

    You can find my take on the banking crisis at

  25. sglover

    Obama has begun to introduce some sanity into American relations with Iran. The likelihood of a truly catastrophic war with that country is lessened, which is no small thing. I think this will turn out to be the best thing he did, maybe the only real accomplishment of his term.

    Some provisions of the ACA are good. The thing as a whole is far from adequate. There’s a perverse truth in the claim that single payer/Medicare for all/whatever was impossible: If you give up at the beginning, then yeah, lots of things are “impossible”.

    Otherwise, yes, Obama pretty much pissed it all away in what could have been his own Hundred Days. He made two unnecessary epic strategic blunders: He never tried to bring the parasitic finance “industry” to heel, and he threw away the initiative trying to “reach across the aisle” to Republicans who always made it plain that they would not work with him ever, for anything.

    At least, those **look** like blunders. The charitable take on Obama is that he’s not the boy genius that all the “constitutional scholar” horseshit made him out to be. The uncharitable, though maybe correct, take is that his “conflict” with Republicans was all the usual Beltway song and dance, and that he relied on them to constrain him from veering left at all.

    When do you think Hope’n’Change will collect his first six-figure “speaking fees”, after leaving the White House? I give it three months.

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