Book Overview by the Journal of Regulation & Risk North Asia

In a patriotic call to arms, former FDIC chief, William M. Isaac, pulls no punches in his new book, ‘Senseless Panic’.

THE financial panic of 2008 and the ensu- ing deep recession did not have to hap- pen and I am appalled by the enormous financial, human and political cost of it all. Taxpayers, rightly so, are extremely angry about the events of 2008 and 2009 – they know instinctively that something does not smell right.

I wrote this book – Senseless Panic: How Washington Failed America – to get out the truth about what happened and why and how we can prevent future crises. We, and I mean all of us and our great country, are in enormous trouble! If we do not take the time to learn what went wrong and how to fix it, we, our children, and their children, will pay a big price.

If we let them, our political leaders will do everything in their power to hide their culpability for the mess in which our nation finds itself, and they will enact “politically easy” legislation that will not address the fundamental causes of the crisis and will in fact make things worse. Our leaders are already covering up their role in creating what I call the senseless panic of 2008, are trying to deflect blame to “greedy bankers,” and offering slogans rather than solutions to real and present dangers.

Among other things, they are telling us the Troubled Asset Relief Program (TARP) was essential to calming the markets when, in fact, the TARP did far more harm than good. This book exposes the TARP for what it was – an ill-conceived programme hastily slapped together by a panicked government working too close for my comfort with a handful of Wall Street firms. It set off an eco- nomic and political firestorm from which we have yet to recover.

Carter appointee

I had the privilege of leading the Federal Deposit Insurance Corporation (FDIC) dur- ing the bank and thrift crises of the 1980s, having been appointed to the FDIC board of directors by President Carter in 1978 at the age of 34. Little did I know when I took the post that the country was about to experi- ence the worst economic and banking crisis since the Great Depression – a crisis that would result in larger and more severe bank failures than in the 1930s.

Inflation had been high throughout the 1970s and it was getting worse. President Carter appointed PaulVolcker as chairman of the Federal Reserve in 1979 with the charge of getting inflation under control. Volcker raised interest rates rapidly and the prime rate soared to an incredible 21.5 per cent. Few financial institutions or borrowers could absorb that kind of rate increase.

Following Ronald Reagan’s election in 1980, I was named chairman of the FDIC. The entire banking and thrift sector was in dire straits. A short recession occurred in 1980 followed by a deep and prolonged recession in 1981-82, with unemployment soaring to 11 per cent.

Decade of failures

From 1980 through 1991 some 3,000 banks and thrifts failed, including many of the larg-est in the country (nine of the 10 largest Texas banks, for example). The failed banks and thrifts had $650 billion of assets and cost the FDIC fund more than $100 billion (multiply those numbers by six to put them into rela- tive terms to today’s banking system).

It was an extremely difficult period, but the public’s confidence in the banking sys- tem held and financial panic was averted. Even as we handled thousands of bank and thrift failures, the economy improved and we enjoyed the longest peacetime economic expansion in history.

Contrast this result in the 1980s with the worldwide financial panic that hit in the fall of 2008 and threatened to push the world into an economic depression.

The economy was actually quite strong in pre-financial crisis 2007 unlike 1980- 1982, so why did we experience such different outcomes in the financial markets this time around?

It is impossible to listen to or read a news report about the crisis of 2008 and beyond without being told that the problems in this latest crisis are much worse than in any period since the Great Depression of the 1930s. When people do talk about the 1980s, most refer only to the S&L crisis and seem not to be aware how serious the banking and economic problems were during that period.

Most people – members of Congress included – would be surprised to learn that we were so concerned about the condition of our major banks during the 1980s that we developed a contingency plan to nationalise all of them. As late as the Presidential Debate of 1992, candidate Ross Perot asserted that the FDIC fund was horribly inadequate to cope with what he believed was the massive insolvency of our major banks.

Navigating the storm

In this book, I discuss how we were able to navigate the treacherous economic and banking waters in the 1980s without creat- ing a financial panic and why we failed to contain the less serious problems in 2008 that nearly sank the financial system.

Having lived 24/7 the banking and S&L crises of the 1980s, I examine the lessons we learned and failed to learn from that period and identify the mistakes that led to the senseless panic of 2008. It was a panic that would not have happened had our political leaders acquired even passing knowledge of what happened during the 1980s and how we dealt with the enormous problems.

Many historians believe that World War II was a continuation of World War I. They believe that the issues that led to the first war were not resolved and the Treaty of Versailles was terribly flawed, so after a 20-year hiatus the fight resumed. Similarly, I believe the banking and S&L crises of the 1980s were misunderstood by our political leaders, the wrong“fixes”were put into place during the 1990s, and those actions led us directly into the banking crisis of 2008.

Based on what I have seen thus far from the Obama Administration and the legisla- tive efforts on Capitol Hill, we have not got- ten any smarter this time around and I fear for the future of our great nation.

Prof Hurley’s thoughts

This is what Prof. Cornelius Hurley of Boston University and former assistant general counsel in the Federal Reserve Board had to say after reviewing Bill Isaac’s latest missive against Washington: Before “too big to fail” became part of our lexicon, there was Bill Isaac, chairman of the FDIC in the 1980s. Drawing on his experience from that era leading the banking system out of a potential catastrophe, Isaac in his new book, Senseless Panic has provided us with a must- read analysis for anyone looking to under- stand the 2008 economic crisis.

Senseless Panic offers both fresh insight and devastating analysis, showing how a pattern of governmental inaction and regulatory failures played leading roles in the meltdown. During the critical days in September 2008, when Congress was debating the original bailout package, Isaac was called on by a bipartisan group of legislators to educate Congress on the failings of the government’s plan. He played a crucial role in defeating the initial proposal in the House.

Though it eventually passed, Isaac presents a clear-eyed critique of TARP as unnecessary and a waste of taxpayers’money.

Poor agency responses

Isaac first gives readers a succinct and straightforward look at how in the 1980s the FDIC and Paul Volker’s Fed managed to stave off a brewing bank panic with unpopular but necessary steps. He provides a road- map on how later the lack of political will, agency turf wars and boneheaded policy responses to the bank and S&L crises of the 1980s led to the current debacle.

Isaac explains how banking regulators need to have the courage to promote unpopular counter-cyclical strategies to protect the financial markets. Isaac shows how the regulators botched the job, calling out a bipartisan collection of economic and political leaders including treasury secretaries, the SEC and FASB for their failed policies and poor reaction to the crisis of 2008.

Senseless Panic is an important book, one that should be on the reading list of any- one interested in America’s economic well being. Isaac shows how the failure to understand and appreciate the banking crises of the 1980s turned the inevitable economic downturn in 2008 into an economic force of destruction. For the next generation of economic policymakers looking to head off an economic tsunami, Senseless Panic is the place to start.