On the Brink: Inside the Race to Stop the Collapse of the Global Financial System

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On the Brink: Inside the Race to Stop the Collapse of the Global Financial System Henry M. Paulson, Jr. Business Plus, 2010

Henry Paulson was the U. S. Treasury Secretary for the final two and a half years of the George W. Bush administration, serving from July 10, 2006, until Barack Obama's inauguration as president on January 20, 2009. This makes Paulson one of the two figures most at the center of the government's response to the Great Credit Crisis of 2007-9. The other was Ben Bernanke, who on February 1, 2006, had replaced Alan Greenspan as the chairman of the Federal Reserve. When Paulson accepted appointment to his position, he had an express understanding with President Bush that he would be Bush's "primary economic adviser and spokesman." This primacy was an enhancement of the Treasury's assigned function, which was to be "primarily a policy-making institution, charged with advising the president on economic and financial matters."

The point has often been made that the United States needed an officer or agency to track the systemic health of the financial system. It would seem, however, that the successive Secretaries of the Treasury, in their role as adviser to the president of the United States, were in the ideal position to play this role (with the help of their expert staffs), in coordination with the banking committees of the Congress. It is hard to see how they could carry out their function without a broad systemic concern. Indeed, soon after assuming office as the Treasury Secretary, Paulson met with President Bush and "detailed the big increase in the size of unregulated pools of capital such as hedge funds and private-equity funds, as well as the exponential growth of unregulated over-the-counter derivatives like credit default swaps. 'All of this,' I concluded, 'has allowed an enormous amount of leverage - and risk - to creep into the financial system.'" It is understandable that Bush wanted to know, "how did we get into this position?"

It was a question that pointed directly to an intellectual and political failure of the first order. To be sure, recent years have seen magnificent advances in science and technology, but in matters economic, social and political in the United States there has been a serious default. An elite, large and amorphous but bound together by a common impulse and considerable self-interest, dominates both of the major political parties and the commanding heights of business and academia, while its regnant ideology of globalism, multiculturalism and unrestrained markets has come to spurn the interests and wishes of the average citizen.

For his part, Paulson was a member of that elite, having long been the top man at Goldman Sachs, and, as we will see, his actions reflected its predilections. Nevertheless, Paulson deserves credit for not himself having been in altogether deep sleep through the lead-up to the crash. In March 2008, the administration, acting through him and his staff at Treasury, proposed a "raft of recommendations" for financial reform and for "a new regulatory structure" that would include "a macrostability regulator." But this was twenty months after Paulson was sworn in, and in any event the reforms had been needed for several years. If Paulson is to bear responsibility for the factors that led up to the crash, it would simply be that he shared, to some degree, the government's, economists' and financial institutions' lack of urgency that the extreme brinksmanship of global finance required.

The dangers had long been seen. An important minority of commentators had warned of them. As far back as 1997, William Greider, in his One World, Ready or Not: The Manic Logic of Global Capitalism, described the growth of a rapidly expanding global financial market in which trillions of dollars sloshed around at great speed, warned about how that market tip-toed on the brink of disaster, and recommended reforms to tame it. He spoke of an "acceleration in trading" that had spread beyond currencies to "bonds, stocks, commercial notes, even bundles of home mortgages. …