WASHINGTON—There is a moment in former Treasury Secretary Henry Paulson’s memoirs when—during a Capitol Hill discussion over a financial rescue plan—he succumbs to stress and suffers an attack of dry heaves in front of a U.S. senator.
This episode is symbolic of what was happening in the country—the panicked spasms of government action to save big banks from going under that Paulson narrates in On the Brink, his inside account of the U.S. financial catastrophe. It is punctuated with episodes of fear; at one point he tells his wife: “Everybody is looking to me, and I don’t have the answer. I am really scared.” The entire government was scared. The result was that between the rescue of Bear Sterns in March 2008 and the rescue of the auto companies in December of that year, an array of bailouts, takeovers and money-pumping acts of desperation gave the U.S. government near-dictatorial control over much of the world’s foremost economy.
We think of statism as born out of altruism or megalomania. But here a third cause transpired: naked, primeval fear. The notion that people could be left to sort themselves out in the biggest financial crisis since the 1930s was terrifying even for Paulson, a true believer in free markets who keeps repeating in his book that he disliked what he was doing. The fear was so overpowering that Paulson, his colleagues and Wall Street decided to put unconditional faith in the very institution, the federal government, that the author tells us was responsible for the conditions under which the housing bubble occurred: easy money, political incentives for homeownership and regulatory incompetence.