Decision Points

Security and Medicare, but Democrats opposed my efforts and support in my own party was lukewarm.
    Part of the problem was that the fiscal crisis seemed a long way off to the legislative branch while I was in office. In early 2008, the Congressional Budget Office estimated that the debt would not exceed 60 percent of GDP until 2023. But because of the financial crisis—and spendingchoices made after I left office—debt will exceed that level by the end of 2010. A fiscal crisis that many saw as distant is now upon us.

    “Wall Street got drunk, and we got the hangover.”
    That was an admittedly simplistic way of describing the origins of the greatest financial panic since the Great Depression. A more sophisticated explanation dates back to the boom of the 1990s. While the U.S. economy grew at an annual rate of 3.8 percent, developing Asian countries such as China, India, and South Korea averaged almost twice that. Many of these economies stockpiled large cash reserves. So did energy-producing nations, which benefited from a tenfold rise in oil prices between 1993 and 2008. Ben Bernanke called this phenomenon a “global saving glut.” Others deemed it a giant pool of money.
    A great deal of this foreign capital flowed back to the United States. America was viewed as an attractive place to invest, thanks to our strong capital markets, reliable legal system, and productive workforce. Foreign investors bought large numbers of U.S. Treasury bonds, which drove down their yield. Naturally, investors started looking for higher returns.
    One prospect was the booming U.S. housing market. Between 1993 and 2007, the average American home price roughly doubled. Builders constructed homes at a rapid pace. Interest rates were low. Credit was easy. Lenders wrote mortgages for almost anyone—including “subprime” borrowers, whose low credit scores made them a higher risk.
    Wall Street spotted an opportunity. Investment banks purchased large numbers of mortgages from lenders, sliced them up, repackaged them, and converted them into complex financial securities. Credit rating agencies, which received lucrative fees from investment banks, blessed many of these assets with AAA ratings. Financial firms sold huge numbers of credit default swaps, bets on whether the mortgages underlying the securities would default. Trading under fancy names such as collateralized debt obligations, the new mortgage-based products yielded the returns investors were seeking. Wall Street sold them aggressively.
    Fannie Mae and Freddie Mac , private companies with congressional charters and lax regulation, fueled the market for mortgage-backedsecurities. The two government-sponsored enterprises bought up half the mortgages in the United States, securitized many of the loans, and sold them around the world. Investors bought voraciously because they believed Fannie and Freddie paper carried a U.S. government guarantee.
    It wasn’t just overseas investors who were attracted by higher returns. American banks borrowed large sums of money against their capital, a practice known as leverage, and loaded up on the mortgage-backed securities. Some of the most aggressive investors were giant new financial service companies. Many had taken advantage of the 1999 repeal of the Glass-Steagall Act of 1932, which prohibited commercial banks from engaging in the investment business.
    At the height of the housing boom, homeownership hit an all-time high of almost 70 percent. I had supported policies to expand homeownership, including down-payment assistance for low-income and first-time buyers. I was pleased to see the ownership society grow. But the exuberance of the moment masked the underlying risk. Together, the global pool of cash, easy monetary policy, booming housing market, insatiable appetite for mortgage-backed assets, complexity of Wall Street financial engineering, and leverage of financial institutions created a house of cards. This precarious structure was fated to collapse as soon as the underlying card—the nonstop growth of housing prices—was pulled out. That was clear in retrospect. But very few saw it at the time, including me.

    In May 2006, Josh Bolten walked into the Treaty Room with a guest he was trying to recruit to the administration, Goldman Sachs CEO Henry Paulson. I hoped to persuade Hank to succeed Secretary of the Treasury John Snow . John had been an effective advocate of my economic agenda, from tax cuts to Social Security reform to