41ButI’mnottalkingabouta bailout.Forgenerations,and
ostsuccessfullyintheDepression’saftermath,theU.S.
s usedpublic-privatepartnershipstodrivethecountry’s
onomicexpansion,allowingentrepreneursandinno-
tivecompaniestotakeadvantageofthelong-termplan-
ngandfinancialstrengthofUncleSam.Thisstrategyled
newindustriesandtechnologies,creatingmillionsofgood
iddle-classjobsintheprocess.Thisisthesolutionthat
ustnolongerbeoverlooked.Whatweneedrightnoware
blic-privatepartnershipsona scalenotattemptedsince
e Depression.henthestockmarketcrashedin1929,theFederalReserve
asa younginstitutionwithlimitedauthority.Revivingthe
onomywasthejoboftheWhiteHouseandCongress.
ogramssuchastheWorksProgressAdministration,in
hichthefederalgovernmenthiredworkerstobuildmore
anhalfa millionmilesofstreetsand10,000bridges,along
ithairports,dams, highways,andsanitationsystems,
lpedalleviatemassunemployment.However,thelast-
g economicgainscamenotfromtemporaryworkpro-
ams,butratherfromtheReconstructionFinanceCorp.,a
blic-privateentitybetterknownastheRFC.
LouisHyman,aneconomichistoriananddirectorofthe
stituteforWorkplaceStudiesatCornell,recentlydescribed
FCintheAtlanticas“anindependentagencywithinthefed-
algovernmentthatsetuplendingsystemstochannelpri-
tecapitalintopubliclydesirableinvestments.It innovated
newsystemsofinsurancetoguaranteethoseloans,anddeliv-
eredprofitstobusinessesinperilduringtheDepression.”
Mostimpressive,asHymanhasnoted,theseprogramscost
taxpayersnothing.
TheRFCwasanenormouseconomicmultiplier.Start
withtheDepression-erabreakdownofthebankingsystem.
Thatinstitutionalcollapsewasn’tcausedbya lackofcapital;
larger national banks such as National City Bank and Bank
ofAmerica had idle cash. But low potential returns, com-
bined with post-traumatic stress lingering from the stock
crash, made bankers so risk-averse they wouldn’t even lend
toeach other.
The RFC’s solution in 1934 was for private bank employ-
ees to work with its subsidiary, the Federal Housing
Administration, to create insurance for pools of mort-
gages. This led to a resurgence of financing for home pur-
chases. Another RFC subsidiary, the Rural Electrification
Administration, worked with farm cooperatives and banks
to issue low-interest 20-year loans to run thousands of miles
of electrical wires to rural farms and ranches—something the
private sector had said would be too expensive.
During the years before World War II, the RFC created the
Defense Plant Corp., offering loans and tax benefits for the
manufacture of tanks, planes, and other weapons used by
the Allies to fight the Nazis. The DPC helped add 50% to the
country’s manufacturing capacity by the war’s end, according
to Hyman. In 1940 it was responsible for 25% of the nation’s
entire gross domestic product. Hyman noted that it remade
the U.S. aerospace and electronics industries, turning them
into some of the largest sectors in the economy.
Half a century later, most Americans have forgotten all that
these public-private partnerships accomplished—to such an
extent that there is political hay to be made by demonizing gov-
ernmentprogramsofanykind.We’velivedofftheirfruitswhile
failingtoestablishnewprograms.Thisvoidhasledtoa listof
structuralissues:underemployment, an increasing wage gap,
a lack of household savings, and a looming retirement crisis.
By the time the Great Recession arrived in the late aughts,
Congress resisted the idea of a big stimulus plan. That was,
until Federal Reserve Chairman Ben Bernanke informed them
the nation was “days away from a complete meltdown of our
financial system,” as then-Senator Christopher Dodd later
recounted. Even then, lawmakers didn’t do all that much,
passing the $700 billion Troubled Asset Relief Program,
which was later reduced to $431 billion, and the American
Recovery and Reinvestment Act of 2009, a $787 billion plan
that included short-term benefit extensions and tax cuts.
While Congress dithered, the response of the U.S. central
bank was unprecedented. The Fed fashioned dozens of pro-
grams to put $4 trillion into credit markets. This helped to
unfreeze credit markets and allowed bank lending to occur.
The Great Depression had FDR; the Great Recession had
Ben Bernanke.
His actions were effective in a narrow sense: He saved the
finance sector. The Fed’s zero-interest-rate policy stopped
2/28 adjustable-rate mortgages—loans with teaser rates that
shot higher after 24 months—from resetting, which prevented
defaults. This gave banks time to gradually improve their bal-
ance sheets, but it planted seeds that led to a variety of unin-
tended consequences.
Saving the banks turned out to be a boon to property own-
ers, homebuilders, and the private equity funds that were
investing in distressed real estate, who saw their holdings
quickly recover their value. But those who didn’t own homes,
including many people who’d lost them to foreclosure, were
turned into renters.
Investors did well, of course. If you still owned stock in
March2009,whenthemarkethititslowestpoint—orbet-
teryet,if youhadenoughcapitaltobuymorestock—your
risk-taking was richly rewarded. From those lows, the S&P
500 tripled over the next few years. Even with the recent
post-Covid correction, the index is still worth four times
what it was in 2009.
Most Americans don’t own much in stocks. In a 2017
study, Edward Wolff, a professor at New York University and
researcher at the National Bureau of Economic Research,
found that the wealthiest 10% of U.S. households owned 84%
of all stocks. During the recovery, the wealthiest segments of
society got wealthier. I should disclose that I benefited from it
personally, too. My firm, Ritholtz Wealth Management, man-
ages more than a billion dollars in stocks and bonds. Our cli-
ents did well in part because their portfolios have benefitedBloomberg Businessweek May 4, 2020