This week, the Senate Banking Committee considered the Obama administration's plan to limit the growth of the country's largest banks. The proposal comes after the unpopular — some say, necessary — bank bailouts by the U.S. government.
Former Treasury Secretary Henry Paulson led that federal intervention, aimed at slowing the nation's economic meltdown. And it's a subject he addresses in his new memoir, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.
In an interview with host Scott Simon, Paulson says the U.S. needs more regulatory power to prevent another financial crisis and he addresses some key questions about his tenure during one of the darkest eras of American economic history.
"We need the authority — and the Obama administration, Congress is working on creating that authority — so that if necessary, a regulator can step in and has the power to liquidate an institution, to liquidate and let it fail in a manner so that it doesn't hurt the American people," Paulson says.
What would have happened if the government hadn't intervened in the financial crisis?
"It would have been very bad. I knew we were on the brink when blue-chip industrial companies were having trouble raising money," Paulson says. "If the system had collapsed, many, many Main Street companies, not Wall Street companies, but Main Street companies of all size would have had trouble raising the money to fund themselves."
Paulson says this would have created a ripple effect throughout the economy — companies wouldn't have been able to pay their employees, and employees wouldn't have been able to pay their bills.
"We have today, after everything that's been done, a very painful unemployment situation --10 percent," Paulson says. [The Labor Department reported Friday that the jobless rate fell to 9.7 percent last month.] "The Great Depression: Unemployment got to 25 percent. I think if the system had collapsed, we easily could have had unemployment of 25 percent."
Paulson says he worked closely during his tenure with Federal Reserve Chairman Ben Bernanke and Timothy Geithner, who was then president of the New York Federal Reserve and now serves as Treasury secretary. These were "three people who trusted each other, who had skills that complemented each other, [and] appreciated each other," he says.
What lessons can you draw from the decision that was made not to rescue Lehman Brothers?
Paulson says one of the worst days of the crisis was on Sept. 14, 2008, when the U.S. government learned that a British regular wasn't going to approve a deal to rescue Lehman Brothers. This led to the Wall Street firm's filing for bankruptcy protection and, ultimately, liquidation.
"And I just remember being overcome momentarily with fear, knowing that everyone was looking to me to provide answers, and we were working with an incomplete toolbox," Paulson recalls. "The U.S. government had essentially not updated the authorities and powers that the executive branch had since the Depression."
In your book, you indicate that Americans' relative lack of savings helped to propel the financial crisis. But to spur the economy, don't we have to spend more and create jobs?
"That's a conundrum," Paulson says. "But we as a nation save too little and we borrow too much, both individually and the government. And I believe — I feel so strongly about this point — that if as a consequence of what we are going through, Americans are saving more and spending less, I think it's a good thing."
Copyright 2023 NPR. To see more, visit https://www.npr.org.