Max Baucus is no stranger to global crises.
Baucus, 78, was the longest-serving U.S. senator from Montana. A Democrat, Baucus left public service in 2017 when Republican President Donald Trump replaced him as U.S. ambassador to China, a post he’d held from 2014 to early 2017. Baucus is now retired and living in Bozeman with his wife, Melodee Hanes.
Baucus regained chairmanship of the powerful Senate Finance Committee in January 2007 — just in time for the financial crisis of 2007-2008.
“I remember Hank Paulson called me up, he was then the treasury secretary, and he said, ‘Max, we got a problem,'” Baucus recalled in a recent wide-ranging interview on the MT Lowdown podcast.
As with today’s COVID-19 pandemic and the resulting economic catastrophe, many policymakers were caught off guard by the swiftness and severity of the 2007-2008 crisis, which led to the most significant economic downturn since the Great Depression. Some economists forecast that the current crisis will be much worse.
Baucus sees parallels and differences.
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“In a certain sense, it’s like the current crisis,” Baucus said. “In 2008, when our financial system collapsed, basically it was caused by the mortgage lending system. The big banks got a little lazy looking at the mortgages. And it was all new to us. Suddenly somebody figured out that, ‘hey, it’s a house of cards, these securities that banks are selling aren’t collateralized because the mortgages are falling apart.'”
Despite early warning signs in 2006 and 2007 that significant economic disruption was on the horizon, it took a total collapse of the subprime-mortgage-backed securities sector to spur policymakers into action.
Congress passed the first responsive stimulus bill, the Economic Stimulus Act of 2008, in February 2008. That measure injected $152 billion into the U.S. economy in the form of rebates for low- and middle-income taxpayers, tax incentives for businesses, and increased limits on mortgages eligible for purchase by the government-sponsored enterprises Fannie Mae and Freddie Mac.
A study later found that only about a third of the rebate money was spent, providing little in the way of economic stimulus.
Then, in October 2008, Congress passed a much larger — and much more controversial — stimulus bill called the Emergency Economic Stabilization Act. That measure authorized $700 billion in spending for the Troubled Asset Relief Program (TARP), otherwise known as the bank bailout.
Treasury Secretary Henry Paulsen, a former Goldman Sachs CEO, championed the measure, but critics said the bailout rewarded the very institutions whose recklessness caused the crisis in the first place.
Baucus doesn’t see it that way. He said the 2008 bailout was necessary, if unpleasant, medicine for what ailed the economy.
“Back then, in ’08, we basically trusted the TARP process,” Baucus said. “The feeling in the room was: ‘They’re going to do, basically, what’s right. They’re not going to pad their pockets. They’re not going to give favored loans or equity arrangements to their friends.’ There was just a feeling, back then, that this is a crisis and we’re going to do our very best.”
Baucus said he’s concerned that today’s economic crisis — triggered by a virus rather than risky investment strategies — is a much greater threat to the global economy than the 2008 subprime mortgage crisis. And he fears that government attempts to stimulate the economy in response, already approaching $3 trillion and likely to grow, will be hampered by partisanship and graft.
“I’m a little concerned now that we’re in a different situation, where we have to look at more spending now than we did back then,” Baucus said. “In addition to that, there’s just the partisanship in Washington. There’s just no trust now between both parties in Washington. In fact, it bothers me.”
The federal response is big, it’s immediate, but it’s probably full of loopholes, Baucus said.
“There’s going to be some profiteering. Some companies are going to make a buck on this at the expense of the people in our country, at the expense of taxpayers.”