Decision Points

expert on the Great Depression. Beneath his gentle demeanor was a fierce determination to avoid the mistakes of the 1930s. I hoped America would never face a scenario like that again. But if we did, I wanted Ben at the helm of the Federal Reserve.
    As Fed chairman, Ben developed a close relationship with the other members of my economic team, especially Hank Paulson . Ben and Hank were like the characters in
The Odd Couple
. Hank was intense; Ben was calm. Hank was a decisive business leader; Ben was a thoughtful analyst who had spent much of his life in universities. Hank was a natural talker; Ben was comfortable listening.
    Their opposing personalities could have produced tension. But Hank and Ben became perfect complements. In hindsight, putting a world-class investment banker and an expert on the Great Depression in the nation’s top two economic positions were among the most important decisions of my presidency.

    With Ben Bernanke (
left
) and Hank Paulson.
White House/Eric Draper

    I began my final year in office the same way I had started my first, concerned about a bursting bubble and pushing for tax relief.
    In mid-2007, home values had declined for the first time in thirteen years. Homeowners defaulted on their mortgages in increasing numbers, and financial companies wrote down billions of dollars in mortgage-related assets. Council of Economic Advisers Chairman Eddie Lazear , a brainy and respected Stanford professor, reported that the economy was slowing down. He and the economic team believed we might be able to mitigate the effects with well-timed tax relief.
    In January 2008, I sent Hank Paulson to negotiate a bill with Speaker Nancy Pelosi and House Minority Leader John Boehner . They hammered out a plan to provide temporary tax incentives for businesses to create jobs and immediate tax rebates for families to boost consumer spending. Within a month, the legislation had passed by a broad bipartisan majority. By May, checks of up to $1,200 per family were in the mail.
    The economy showed some signs of resilience. Economic growth reports were positive, unemployment was 4.9 percent, exports had reached record highs, and inflation was under control. I was hopeful we could dodge a recession.
    I was wrong. The foundation was weakening, and the house of cards was about to come tumbling down.

    Early in the afternoon of Thursday, March 13, we learned that Bear Stearns , one of America’s largest investment banks, was facing a liquidity crisis. Like other Wall Street institutions, Bear was heavily leveraged. For every dollar it held in capital, the firm had borrowed thirty-three dollars to invest, muchof it in mortgage-backed securities. When the housing bubble popped, Bear was overexposed, and investors moved their accounts. Unlike the run on First National Bank in Midland, there were no paper sacks.
    I was surprised by the sudden crisis. My focus had been kitchen-table economic issues like jobs and inflation. I assumed any major credit troubles would have been flagged by the regulators or rating agencies. After all, I had strengthened financial regulation by signing the Sarbanes-Oxley Act in response to the Enron accounting fraud and other corporate scandals. Nevertheless, Bear Stearns’s poor investment decisions left it on the brink of collapse. In this case, the problem was not a lack of regulation by government; it was a lack of judgment by Bear executives.
    My first instinct was not to save Bear. In a free market economy, firms that fail should go out of business. If the government stepped in, we would create a problem known as moral hazard : Other firms would assume they would be bailed out, too, which would embolden them to take more risks.
    Hank shared my strong inclination against government intervention. But he explained that a collapse of Bear Stearns would have widespread repercussions for a world financial system that had been under great stress since the housing crisis began in 2007. Bear had financial relationships with hundreds of other banks, investors, and governments. If the firm suddenly failed, confidence in other financial institutions would diminish. Bear could be the first domino in a series of failing firms. While I was concerned about creating moral hazard, I worried more about a financial collapse.
    “Is there a buyer for Bear?” I asked Hank.
    Early the next morning, we received our answer. Executives at JPMorgan Chase were interested in acquiring Bear Stearns, but were