1134 ★ CHAPTER 28 A New Century and New Crises
the American economy through crises ranging from the stock market collapse
of 1987 to the terrorist attacks of 2001. Greenspan had presided over much of
the era of deregulation, artificially low interest rates, and excessive borrowing
and spending. He and his successors had promoted the housing bubble and saw
all sorts of speculative behavior flourish with no governmental intervention.
In effect, they allowed securities firms to regulate themselves.
In 2008, Greenspan admitted to Congress that there had been a “flaw” in
his long- held conviction that free markets would automatically produce the
best results for all and that regulation would damage banks, Wall Street, and
the mortgage market. He himself, he said, was in a state of “shocked disbelief,”
as the crisis turned out to be “much broader than anything I could have imag-
ined.” Greenspan’s testimony seemed to mark the end of an era. Every president
from Ronald Reagan onward had lectured the rest of the world on the need to
adopt the American model of unregulated economic competition, and berated
countries like Japan and Germany for assisting failing businesses. Now, the
American model lay in ruins and a new role for government in regulating eco-
nomic activity seemed inevitable.
Bush and the Crisis
In the fall of 2008, with the presidential election campaign in full swing, the
Bush administration seemed unable to come up with a response to the crisis.
In keeping with the free market ethos, it allowed Lehman Brothers to fail. But
this immediately created a domino effect, with the stock prices of other banks
and investment houses collapsing, and the administration quickly reversed
course. It persuaded a reluctant Congress to appropriate $700 billion to bail out
other floundering firms. Insurance companies like AIG, banks like Citigroup
and Bank of America, and giant financial companies like the Federal Home
Loan Mortgage Corporation (popularly known as Freddie Mac) and the Federal
National Mortgage Association (Fannie Mae), which insured most mortgages
in the country, were so interconnected with other institutions that their col-
lapse would drive the economy into a full- fledged depression. Through the
federal bailout, taxpayers in effect took temporary ownership of these compa-
nies, absorbing the massive losses created by their previous malfeasance. Giant
banks and investment houses that received public money redirected some of it
to enormous bonuses to top employees. But despite the bailout, the health of
the banking system remained fragile.
The crisis also revealed the limits of the American “safety net” compared
with other industrialized countries. In western Europe, workers who lose their
jobs typically receive many months of unemployment insurance amounting to
a significant percentage of their lost wages. In the United States, only one- third