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Soft Landing

Why 'too big to fail' leads to costly mistakes.

Nov 23, 2009, Vol. 15, No. 10 • By EMILY ESFAHANI SMITH
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After the Fall

Saving Capitalism from Wall Street and Washington

by Nicole Gelinas

Encounter, 250 pp., $23.95

At a congressional hearing last fall, Frank Raiter, a former Standard and Poor's executive, described the financial system as if it were a train on tracks: "The engine was powered by the low interest rates that prevailed after the turn of the century," he declared. "The conductors were the lending institutions, and investment bankers who made the [subprime] loans and packaged them into securities, and the rating agencies were the oilers who kept the wheels of the train greased."

And the passengers? "Investors. And it was standing room only."

With low interest rates, money was cheap, so everybody, from homeowners-in-waiting to bankers, borrowed massively, often beyond their means. Confident that the value of housing would only go up, the train rode off the edge of an exploding credit bubble that didn't just pop, but burst, in 2008. The train hit a wall when the financial meltdown reached a fever pitch in September: Lehman Brothers crumbled, the feds bailed out AIG the next day, and the Dow Jones Industrial Average received its worst beat-down since 1931. Then came TARP, the auto bailouts, and the economic stimulus. After all that, Bear Stearns's bailout this past March seemed like nothing more than a bad day on the road to serfdom.

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