Decision Points

end of his eventful tenure, Roosevelt exclaimed, “I knew there would be a blizzard when I went out.”
    I know what he meant. The period between September and December 2008 was the most intense, turbulent, decision-packed stretch since those same months in 2001. Because the crisis arose so late in my administration, I wouldn’t be in the White House to see the impact of most of the decisions I made. Fortunately, by the time I left in January 2009, the measures we had taken had stabilized the financial system. The threat of a systemic collapse had passed. Once-frozen credit markets had begun flowing again. While the world still faced serious economic insecurity, the panic mentality was gone.
    The following year brought a mixed picture. The stock market fell during the first two months of 2009 but ended the year up more than 19 percent. As banks rebuilt their balance sheets, they began to redeem government-owned shares. By the fall of 2010, the vast majority of the capital the Treasury injected into banks had been repaid. As the economy regains strength, more of that money will be repaid, plus dividends. A program derided for its costs could potentially end up making money for American taxpayers.
    I’ve often reflected on whether we could have seen the financial crisis coming. In some respects, we did. We recognized the danger posed by Fannie and Freddie, and we repeatedly called on Congress to authorize stronger oversight and limit the size of their portfolios. We also understood the need for a new approach to regulation. In early 2008, Hank proposed a blueprint for a modernized regulatory structure that strengthened oversight of the financial sector and gave the government greater authority to wind down failing firms. Yet my administration and the regulators underestimated the extent of the risks taken by Wall Street. The ratings agencies created a false sense of security by blessing shaky assets. Financial firms built up too much leverage and hid some exposure with off–balance sheet accounting. Many new products were so complex that even their creators didn’t fully understand them. For all these reasons, we were blindsided by a financial crisis that had been more than a decade in the making.
    One of the questions I’m asked most often is how to avoid another financial crisis. My first answer is that I’m not sure we’re out of the woods on this one yet. Financial institutions around the world are still unwinding their leverage, and governments are saddled with too much debt. To fully recover, the federal government must improve its long-term fiscal position by reducing spending, addressing the unfunded liabilities in Social Security and Medicare, and creating the conditions for the private sector—especially small businesses—to generate new jobs.
    Once the economy is on firm footing, Fannie and Freddie should be converted into private companies that compete in the mortgage market on a level playing field with other firms. Banks should be required to meet sensible capital requirements to prevent overleveraging. The credit-rating agencies need to reevaluate their model for analyzing complex financial assets. And boards of directors must put an end to compensation packages that create the wrong incentives and reward executives for failure.
    At the same time, we must be careful not to overcorrect. Overregulation slows investment, stifles innovation, and discourages entrepreneurship. The government should unwind its involvement in the banking, auto, and insurance sectors. As it addresses financial regulation, Congress should not infringe on the Federal Reserve’s independence in conducting monetary policy. And the financial crisis should not become an excuse to raise taxes, which would only undermine the economic growth required to regain our strength.
    Above all, our country must maintain our faith in free markets, free enterprise, and free trade. Free markets have made America a land of opportunity and, over time, helped raise the standard of living for successive generations. Abroad, free markets have transformed struggling nations into economic powers and lifted hundreds of millions of people out of poverty. Democratic capitalism, while imperfect and in need of rational oversight, is by far the most successful economic model ever devised.

    The nature of the presidency is that sometimes you don’t choose which challenges come to your desk. You do decide how to respond. In the finaldays of my