Spent the weekend reading “On the Brink”, the crisis management memoir of Hank Paulson, who was Treasury Secretary in the waning days of the Bush Presidency.  It fell to Paulson to co-ordinate the government’s response to the crash of 2007-2008, whose effects (26 million unemployed people) continue today.

It isn’t easy reading.  Paulson, an ardent free market advocate and former Chairman of Goldman Sachs, swallowed his free market principles, and presided over massive federal intervention to prop up not only the financial system, but also the auto and insurance industries.  If he had not done do, we’d have had 50 million unemployed people, a massive wave of personal and corporate bankruptcies and, in some places, most likely armed insurrection.

It was scary reading.  Our banking sector mirrored the finances of ordinary citizens- leveraged out the window and dependent literally on the next cash in the door. Moreover, they were all lashed together by shared financial obligations.   When the weakest institutions, like Bear Stearns and Lehman Brothers,  were assailed by withdrawals of funds and short sellers in the stock market, their stronger bretheren stopped believing that other banks would pay them back and capital markets just shut down. 

This was the financial equivalent of a heart attack-no oxygen to brain or heart. Eight huge international banks and several large government backed entities (mortgage giants Fannie Mae and Freddie Mac) failed, and were merged or placed on life support. We came within an eyelash of losing our society. 

Scariest were the politics.  Financially illiterate voters and their frightened elected representatives viewed “restoring oxygen to the heart and brain” to be a bailout of the bankers  (who, along with their stockholders, were wiped out, and lost billions of dollars in wealth and retirement funding). People just don’t understand how our financial system works- where their paychecks come from or how the products they buy (food, for example) get produced.

Financially illiterate left wing Congresspeople wanted to nationalize the banks (so they could lend money to their friends).   Financially illiterate right wing Congress people simply wanted the government to let the banks all fail (and wipe out all our savings and retirement funds). 

There were some grow-ups in this story, including Barney Frank, Chairman of the House Banking Committee,  then President Bush, and, fortunately,  our current President Obama, who was calm, thoughtful and really helpful in resolving the crisis while still running for office.  John McCain literally destroyed his campaign over his mishandling of the crisis, and revealed himself to be a hotheaded, shoot-from-the lip egomaniac. 

What I found frightening about Paulson’s book was how unready and ill-equipped we are to manage another financial crisis, and how likely it is moderate, thoughtful people will be driven from office.    If we’re not careful, we’ll have a gridlocked government where political “leaders” pander to our fears, and spend their energy scoring points while the rest of us wait for thoughtful solutions to our problems. We haven’t learned anything from this crisis, from which we have yet to recover.