Specification of Pragmatist Political Crisis Management: Decisions based on internal deliberation
Dewey argued in Human Nature and Social Conduct that new impulses often disrupt and challenge our existing habits. According to Dewey, we have to rely on the method of “intelligence” to solve such a situation (Dewey 1922). For Dewey “intelligence” is enacted as deliberation or collective inquiry. As Anderson explains:
“When habit is blocked, people are forced to stop their activity and reflect on the problems posed by their situation. They must deliberate. The aim of deliberation is to find a satisfactory means to resumption of activity by solving the problem posed by one's situation” (E. Anderson 2014).
Pragmatist deliberation is closely connected to other pragmatist elements such as fallibilism, experimentalism and its emphasis of consequences. It is characterized by an openness to all feasible options, an emphasis on practical consequences and a quasi-experimentalist attitude. In other words, pragmatist deliberation can be understood as “an imaginative rehearsal of alternative means” and a “thought experiment designed to arrive at a practical judgment, action upon which is anticipated to resolve one's predicament” (E. Anderson 2014). This aspect of deliberation is grasped in the first two specifications of deliberative decision making: “Decisions based on internal deliberation” focuses at the internal decision making process while “Deliberation with external stakeholders” analyses if external stakeholders were included in this deliberation process.
But there is also another aspect to pragmatist deliberation which speaks to the importance of the diversity of opinions in the deliberation process. For pragmatists, such diversity and the inclusion of dissenting voices is necessary to “maintain the state of doubt” (Dewey 1910, 13) and remain open to other options. This aspect is covered by the specification “Encouragement of skeptics” which analyses if dissenting voices and different opinions were actively encouraged and included (see George and Stern 2002).
The actors that will be at the center of this section are president Bush, Treasury Secretary Paulson, New York Federal Reserve director Geithner and Federal Reserve chairman Bernanke (Ip 2008). They all played an important role in the decision making process. The regulator Securities and Exchange Commission (SEC) also took part in the discussions around the Bear Stearns decision and were represented by its chairman Chris Cox and his aides Erik Sirri and Bob Colby (Kelly 2009, 65; Paulson 2010, 100).
Internal Deliberation
Deliberation was an important aspect of the decision making throughout the Bear Stearns case. The first and most striking example can be found in the way the decision to provide an indirect loan to Bear Stearns was made on March 13, 2008. Early in the morning, Paulson, Bernanke, Geithner and their aides convened a conference call which included representatives from the SEC as well (Bernanke 2015, 214; Kelly 2009, 65; Paulson 2010, 1002; U.S. Congress 2008c, 115). The call
lasted for over two hours during which a possible Bear Stearns rescue or bankruptcy was discussed (Geithner 2014, 152). Jamie Dimon, CEO of JPMorgan, joined the call for a few minutes to explain Bear Stearns' situation from his perspective and warned the government actors that a bankruptcy of Bear Stearns would have severe consequences (Paulson 2010, 101; U.S. Congress 2008c, 72). Bernanke led the discussion and inquired about the current situation while Geithner and Kevin Warsh from the New York Fed laid out their assessment that a bankruptcy would have dire consequences, an assessment that was based on their analysis from the night before (Bernanke 2015, 214; Kelly 2009, 63). After examining different options, Geithner introduced the idea of an indirect loan for Bear Stearns via JPMorgan, an idea that had been proposed by the New York Fed's general counsel Tom Baxter only hours before the conference call (Bernanke 2015, 214; Geithner 2014, 151). Bernanke agreed that Bear Stearns needed to be rescued and Paulson concurred (Bernanke 2015, 2014; Kelly 2009, 66; Paulson 2010, 101).
After Paulson obtained approval from president Bush, Geithner pointed out that a decision needed to be made soon since the markets were about to open (Geithner 2014, 152; Wessel 2009, 158). At 7 a.m. Bernanke made the final decision to extend the indirect loan to Bear Stearns. Since the indirect loan was issued by the Federal Reserve Bank which had to invoke the emergency section of the Federal Reserve Act, Bernanke as Fed chairman was the person who officially had to make the decision (Wessel 2009, 156).64
What is interesting from a pragmatist perspective though is that despite Bernanke having the final say, the decision was based on extended discussion and based on the consensus of all involved government actors. As Kelly has described it: “Mr. Bernanke did a head count. All the top officials agreed a loan was the best option. "Let's do it," Mr. Bernanke said.” (Kelly 2009, 67; also see Bernanke 2015, 217). In other words, the decision was not made in a top-down manner and dictated by Bernanke or Bush (as would be the case in principle-guided political crisis management) but instead was based on a two-hour long discussion involving the main government actors (Bernanke, Geithner, Paulson and SEC staff).
Three different scenarios and options were discussed and their potential practical consequences assessed: letting Bear Stearns file for bankruptcy, finding another financial institution which could
64 More precisely, it was a decision that had to be approved by the Federal Reserve Board which was
chaired by Bernanke. After the conference call ended Bernanke convened the three available governors and they unanimously supported the decision (Bernanke 2015, 217; Blinder 2013, 105; Wessel 2009, 162).
support or takeover Bear Stearns or lending public money to Bear Stearns (Kelly 2009, 64; Sidel et al. 2008). After going through the scenario of a Bear Stearns' bankruptcy the group reached the conclusion that its potential consequences could destabilize the whole economy and excluded this option. The second option was excluded since the perceived time pressure did not allow for finding a potential buyer on Friday. This left the third option as the most feasible way to proceed. This collective inquiry and the weighting of different options via thought experiments qualifies as an aspect of pragmatist deliberation. I therefore find evidence for the specification “Decisions based on internal deliberation” in the decision making process.
Internal deliberation continued over the course of the weekend. Treasury Secretary Paulson and New York Fed director Geithner stayed in close contact while Bear Stearns and JPMorgan negotiated a possible merger, shared information and discussed the next steps (Geithner 2014, 154; Ip 2008; Kelly 2009, 203; Paulson 2010, 103–10). The decision on Sunday, March 15 to support the deal between Bear Stearns and JPMorgan with $30 billion from the Federal Reserve Bank was also based on broad internal deliberation. After JPMorgan's CEO Jamie Dimon had contacted Geithner on Sunday morning announcing that JPMorgan would not be able to takeover Bear Stearns without any financial support, Geithner called Paulson and Bernanke (Geithner 2014, 154; Kelly 2009, 203; Paulson 2010, 110).
The first idea that was discussed was that the Treasury should provide the money. But since this required an act by Congress the option was excluded as unpractical under the circumstances of high time pressure (Wessel 2009, 167; Geithner 2014, 155). Geithner suggested that the New York Federal Reserve could cover Bear Stearns' assets and discussed this idea with Bernanke, Paulson and Donald Kohn, the vice chairman of the Federal Reserve board (Geithner 2014, 155; Paulson 2010, 110). After they had agreed on this plan, Bernanke informed his colleagues at international central banks and Paulson talked to president Bush and got his support for the decision (Bernanke 2015, 220; Bush 2008c, 453; Paulson 2010, 113). The Federal Reserve Board approved the $30 billion loan on March 15, 2008 at 3:45 p.m. (Federal Reserve Bank 2008e, 2; Bernanke 2015, 220). I do not find, however, any evidence that allows to identify the second aspect of pragmatist deliberation in the internal decision making process, “Encouragement of skeptics”. I could find no evidence that attempts were made to include skeptical or dissenting voices in the decision making process.
External Deliberation
While the decision making during the Bear Stearns weekend was characterized by a high degree of internal deliberation it also made use of external knowledge. External actors, especially from financial institutions, were consulted and external advisors provided their expertise.
The main role of obtaining this external input was undertaken by the New York Federal Reserve Bank and his director Timothy Geithner, who Ben Bernanke called “the Fed's eyes and ears on Wall Street” (Bernanke 2015, 217). Before the crisis, Geithner had
“initiated a series of dinners at the New York Fed's executive dining room, in which five or six executives from a major Wall Street firm would meet his own top people. When the credit crisis deepened, he began calling chief executives nearly every week, asking: What's changed? What's better? What's worse? What worries you?” (Ip 2008).
This close contact with Wall Street bankers intensified during the Bear Stearns weekend and was further supported by Treasury Secretary Henry Paulson.
During the negotiations between Bear Stearns and JPMorgan, Paulson and Geithner stayed in close contact with the two firms, with Paulson and Geithner acting as “third partner” (Sidel et al. 2008; also see Kelly 2009; NPR 2009). Paulson's aide Neel Kashkari played a key role in this, “shuttling between JPMorgan's and Bear's offices” and updating Paulson on recent developments (Paulson 2010, 108; Wessel 2009, 166). Jamie Dimon, the CEO of JPMorgan briefly joined the conference call between Paulson, Geithner, Bernanke and the SEC that resulted in the decision for the indirect loan on March 13. Dimon offered his perspective, explaining that a failure of Bear Stearns would have drastic consequences (Paulson 2010, 101). After the decision for the indirect loan to Bear Stearns was made, Paulson and Geithner held a conference call with executives of the other major banks, explaining the decision of the indirect loan to them (Kelly 2009, 77; Paulson 2010, 104; Sidel et al. 2008). The main intent of the call was no collective deliberation though, instead Paulson asked the other investment banks “to act in a responsible manner” and to continue to lend to Bear Stearns (Paulson 2010, 104; Kelly 2009, 77).
After the call Geithner met with Paul Volcker, a former chairman of the Federal Reserve, to explain the decision and seek his advice. Geithner explained that the New York Fed tried to bring Bear Stearns to the weekend and hoped to find a buyer for the investment bank soon, an idea that Volcker supported (Geithner 2014, 153; Kelly 2009, 128). The next day, Secretary Paulson received additional external input. In the morning of March 15, 2008 he got a call from Lloyd Blankfein, his successor as Goldman Sachs CEO. Blankfein warned Paulson that the consequences of a Bear
Stearns bankruptcy would be dramatic and would affect the world economy as well (Paulson 2010, 106; Morgenson and Van Natta 2009).
These are examples that show how Paulson and Geithner stayed in close contact with external stakeholders, especially executives of the major Wall Street banks, throughout the weekend. The character of these contacts was twofold: some of them primarily informed external actors about decisions (the conference call with bank executives on March 13). Some gathered information and different perspectives (Paulson's call with Blankfein, Geithner's meeting with Volcker). From a pragmatist perspective, this does not qualify as deliberation though since it cannot be characterized as collective inquiry. Instead it was a process of consultation that did not include external stakeholders in the decision making process (Fung 2006). Others acquired additional expertise, as was the case with the hiring of the company BlackRock to help assessing the assets that would be used to secure the $30 billion loan as discussed in the next paragraphs. Yet, from a pragmatist perspective this does not qualify as external deliberation either. Instead this collaboration brought in BlackRock's special expertise to assess the value of Bear Stearns' assets.
Summary
This section has examined the level of deliberation that took place in the decision making process of the Bear Stearns decision along two dimensions. It has shown that the level of internal deliberation was high, with the involved government actors (Paulson, Geithner, Bernanke) in constant discussion about the next steps. Both the decisions on the indirect loan for Bear Stearns on March 13 and on the $30 billion loan on March 15 to support the deal between Bear Stearns and JPMorgan were based on a process of collective inquiry. I therefore found evidence for the first specification of deliberative decision making, “Decisions based on internal deliberation”. I did not find any evidence, however, for the other two specifications. Neither were external stakeholders included in the decision making (their role is better described as consultation and providing of expertise) nor were skeptical and dissenting voices encouraged.