Table of Contents
The US financial crisis, which has since become global, originated in 2007 when the US mortgage industry began to perform poorly (Kregel 2008). For the past decade, the United States has pursued aggressive supply-side economic policymaking, emphasising low interest rates, low taxes and highly deregulated financial markets (Uchitelle 2008). This created a boom in which money became cheap, and positive forecasts on the housing market encouraged financial institutions and prospective homeowners, respectively, to lend and borrow exceedingly (Obama 2009b). Altogether, this gave rise to sub-prime lending, whereby banks lent money to even those with poor credit histories (Chomsisengphet and Pennington-Cross 2006). When the housing bubble finally burst in 2007, sub-prime mortgage loans, which by this time had grown substantially and had given rise to a lucrative secondary mortgage market (mortgage hedge market), were the most adversely affected (Kregel 2008).
The mortgage crash kicked off a market wind-down beginning, prominently, with Bear Stearns (Bear), a Wall Street investment bank. Earlier the previous year, Bear had implicated itself in the sub-prime mortgage market by committing more than $3 billion dollars to bail out one of its hedge funds that had bet heavily on the sub-prime loans (Burrough 2008). On the morning of 10 March 2008, a rumour about Bear’s liquidity problems began to spread in the financial market (PBS Frontline 2009). An unprecedented stock sell-off ensued, driving the bank’s stock down 47 per cent (Irwin and Tse 2008). Six days later, despite Federal Reserve and Treasury attempts to save the eighty-five-year-old investment bank, Bear ran out of its $18 billion cash reserve and collapsed (Irwin and Tse 2008).
Months later, in September 2008, Fannie Mae and Freddie Mac, the two federally backed mortgage lending firms that had also speculated heavily on the returns from their various mortgage investments, began to falter due to rising defaults on home mortgage repayments (Irwin and Tse 2008). The Bush Administration reacted to this by firing their managements and nationalising the banks (KDKA-TV 2008). In the same month, three other major US financial institutions—Lehman Brothers, Washington Mutual Inc. and American International Group—had either filed for bankruptcy or failed (KDKA-TV 2008). This series of bank collapses was a strident manifestation of an economy in full-blown crisis, threatening the foundations and lifeblood—the financial and credit markets—of the US and world economies. On Thursday, 18 September 2008, Treasury Secretary, Henry Paulson, and Federal Reserve Chairman, Ben Bernanke, painted a bleak picture of the cascading crisis in a hastily convened emergency meeting involving the heads of key US financial institutions and political figures. Respectively, they warned, ‘unless you act, the financial system of this country and the world will melt down in a matter of days’ and ‘if we don’t act tomorrow, we won’t have an economy on Monday’ (PBS Frontline 2009).
Boin et al. (2009) observe from the Thomas theorem that it is not the events on the ground, but their public perception and interpretation that will determine their potential impact. In the case of the United States in September 2008, however, the country was in crisis at all levels: reality, perception, emotion and rhetoric. While the downturn presented policymakers with huge challenges to manage, it also opened political opportunities to exploit—at least for some of them. Drawing on the crisis-framing model of Chapter 2, this chapter studies how US Presidents George W. Bush and later Barack Obama, Treasury Secretaries Henry Paulson and his successor, Timothy Geithner, and the Federal Reserve Chairman, Ben Bernanke, framed the unfolding crisis and its policy and political implications. Some of these actors were predominantly in ‘damage-control’ mode; others were at times perhaps drawn towards ‘opportunity exploitation’. In keeping with the analytical approach of this volume, this chapter also examines how these framing efforts were publicly received by the media and the public, and, thus, to what extent the various elite framing efforts resonated with (parts of) their intended audiences.
It is important to understand the context in which the leaders under study operated. As the meltdown was transforming financial markets, regime change was transforming politics in the United States. President Bush’s tenure was due to end in early 2009 and Democrat candidate, Barack Obama, and Republican John McCain were contending for the presidency in the election due in November 2008. For the two candidates, and the incumbent president, the crisis played into their political manoeuvring. Although the scope of this volume excludes non-executive leaders, occasional reference will be made to the continuing election struggle, especially given that the policy debate between the two contestants reflected a strong partisan—Republican and Democrat—theme, which greatly influenced the political context in which Bush and later Obama operated as presidents when talking about the crisis.