Web Extra: Read an Excerpt of David Stockman's New Book

The contemporary situation was nothing like the early 1930s because the United States was now a massive international debtor and importer. That condition was the opposite of the American economy's posture in 1929 when it had been the era's massive creditor, exporter, and industrial producer; that is, the US back then had played the role belonging now to the red capitalists of China.

At the end of the day, the 2008 financial panic had originated in the canyons of Wall Street; it had actually been contained there during the peak weeks of the crisis, as toxic assets were liquated and wholesale funding was withdrawn; and it would have burnt itself out there had Washington allowed the markets to have their way with errant speculators. Instead, a handful of panicked officials led by Bernanke and Paulson drove Washington into a momentary hysteria, causing it to throw the American taxpayer and the Fed's printing press into the wrong breach. So doing, they stopped a bank run that was needed and perpetuated two giant financial predators which were not.

THE MAIN STREET BANKS WERE NEVER IN DANGER There was no logical or factual basis for the incessantly repeated claim of Washington high officials that Wall Street's losses would spill over into the nation's $12 trillion commercial banking system and from there ripple outward to infect the vitals of the Main Street economy. Owing to the composition of its asset base, the Main Street banking system was never remotely at risk, and it had no need for capital infusions from TARP.

The actual evidence shows the "run" on the wholesale money market was almost entirely confined to the canyons of Wall Street. During the heat of the fall 2008 crisis, there were no runs on the nation's eight thousand commercial banks and thrifts, save for a handful of clearly insolvent higher fliers like Indy Mac and Washington Mutual. Nor would there have been one in the absence of TARP and the Fed's aggressive Wall Street bailout actions.

The carnage on Wall Street in no way weakened the deposit guarantees of the Federal Deposit Insurance Corporation (FDIC) which reassured mom and pop that they did not need to get in line at their local bank branch. The vast bulk of assets held by the commercial banking system were either invested in safe US Treasury debt and government-guaranteed mortgage securities or whole loans to home owners, businesses, and developers which were carried on their "banking books" rather than in "trading" accounts.

There was no reason to fear a contagion of fire sale liquidations of these types of assets or a resulting flight of retail depositors. Even if the national economy plunged into recession, the commercial banking system would experience rising loan loss reserve provisions and weakened profitability. Yet this impact would play out over quarters and years, not in immediate, huge, headline-making loss events which would catalyze public fears about the safety and soundness of their local banks.

There was actually a striking note of irony in the contrast between the relatively safe commercial banking system and the bonfires on Wall Street. As it happened, the mortgage securitization machine had functioned like a giant financial vacuum cleaner, sucking the worst of the subprime and exotic mortgages off the balance sheets of local community lending institutions and into the billion dollar securitization pools assembled on Wall Street.

The main channel for this process, the nonbank mortgage broker industry, was a Wall Street instrumentality of cheap money. By the time of the final housing boom in 2003–2006, in fact, the mortgage broker channel was originating 75 percent of all mortgages. When the financial crisis came, Main Street banks were sound because, ironically, they had been driven out of the high-risk mortgage business by Wall Street and its mortgage broker agents.

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