We Should Have Bailed Out Everyone in 2009

Matt Yglesias tries to referee a dispute between partisans of Tim Geithner, who say that bank bailouts were a critical part of getting the economy running again, and partisans of Neil Barofsky, who say the Obama administration should have spent more time bailing out underwater homeowners who were crushed by the housing bust:

So who's right? I think this is actually a much more difficult question than partisans on either side are willing to acknowledge. Team Tim has bolstered their argument with the overblown notion that homeowner bailouts "launched the Tea Party" via Rick Santelli and are therefore politically impossible and thus one doesn't even really need to address the merits of the case. On the other hand, Team Neil has never really presented a coherent alternative course of action that takes real account of the consequences of imposing very large losses on the banks.

I say: why choose? Like it or not, Team Tim is right: the banks had to be bailed out, the same way you'd bail out electrical utilities rather than let everyone go without electricity. They're just too important to the rest of the economy. Perhaps the bank bailouts should have been more punitive (that's my view), but frankly, this is nibbling around the edges. Punitive or not, we needed to spend a boatload of money to rescue the banks.

But Team Neil is right too: consumer debt overhang has been hobbling the recovery ever since 2008, and it's outrageous that so little money was spent rescuing consumers right along with the bankers. Obama should have pushed a lot harder for cramdown legislation; Fannie and Freddie should have been enlisted to rewrite mortgages; money should have been airlifted into consumer pockets, either to spend or to pay down debt; and schemes should have been set up for homeowners who were too far gone to save that allowed them to rent their homes back from the banks that foreclosed on them.

This is basically a long way of saying that we didn't do enough and we didn't spend enough money. Yes, the banks had to be rescued. But homeowners should have been rescued too. The stimulus needed to be bigger and longer. And the Fed should have ignored the wailings of the wealthy and temporarily targeted a higher inflation rate. None of this would have stopped the recession, but it would have made it a lot shorter and shallower. It's a crime that millions have suffered needlessly because we didn't have the guts to stand up and do this.