Next Time, Let The Banks Go Bankrupt
James Pethokoukis at The Week says there's a way to make sure we never bail out Wall Street again, and it's letting the banks fail but giving tax breaks to families and businesses:
Remember, what Washington did in 2008 was authorize the $700 billion Troubled Asset Relief Program. It eventually pumped some $400 billion of taxpayer dough into American financial institutions -- whether they wanted the cash or not. The politicians could have let insolvent banks simply go bust. True, such a move would have hammered an already weak economy. To avoid a terrible collapse in spending and investment, however, Washington could have deeply cut taxes or sent tax rebates to households and businesses. How to pay for all those checks? Borrow the money from the Federal Reserve which, after all, owns the printing presses. Fiscal stimulus meets monetary stimulus.Some of the money would have been spent, some used to pay off debt, some saved. But the net result likely would have been a far shallower economic downturn, especially if combined with a clear and explicit Fed promise to support spending no matter what. Former Fed chairman Ben Bernanke recommended just such a "helicopter drop" of money to boost the stagnant Japanese economy back in 2003. Too bad he didn't make the same case to Team Bush and Team Obama five years later.
And what about the banks? For starters, a more modest recession and faster recovery would have limited bank failures. And the assets of the ones that did sink could have been purchased by stronger remaining institutions. Indeed, Geithner writes that legendary investor Warren Buffett told him that without TARP, "everything would have crashed, and I would have been the first to buy." Regulators also could have loosened rules to make it easier for startup banks to replace the failed old ones.
The U.S. has experienced a financial crisis, on average, every decade or so for nearly 200 years. Odds are the most recent one won't be the last one. Forcing banks to maintain a much larger capital cushion would go a long way toward avoiding future disasters. But if Big Finance should stumble again, Washington should let it fall. Wall Street banks won't need a bailout, but their Main Street customers will.
You know, there were plenty of medium and pretty big banks that were doing just fine. I don't understand why the government didn't give the money to THEM in exchange for taking over the accounts from the failing big banks. You know... encourage success.
NicoleK at May 16, 2014 4:11 AM
You know, there were plenty of medium and pretty big banks that were doing just fine. I don't understand why the government didn't give the money to THEM in exchange for taking over the accounts from the failing big banks. You know... encourage success.
Posted by: NicoleK at May 16, 2014 4:11 AM
Because that would have exposed the toxic assets that were packaged in the derivatives held by the failing investment banks.
There would have been accounting of the bad assets up front.
One reason the economy hasn't recovered is because the plan to inflate away the bad debt and hide it, through massive government money printing hasn't worked very well.
For a better understanding of what the issues were I recommend this book.
http://www.amazon.com/All-Devils-Are-Here-Bankrupted-ebook/dp/B005DIAUN6/ref=sr_1_1?s=books&ie=UTF8&qid=1400244563&sr=1-1&keywords=all+the+devils+are+here
Isab at May 16, 2014 5:52 AM
You know what else would have been good? Jail. Lots of jail time for people who fraudulently created "AAA" securities for institutions to buy.
It was all a giant Ponzi scheme. And the entire US tax base were the suckers.
Also, if they actually were "too big to fail" then guess what the government has the power to do - break them up.
andrew at May 16, 2014 6:41 AM
What he neglects to tell his readers is that the beneficiaries of the Capital Purchase Program paid dividends on the preferred stock they issued and have repurchased about 95% of it. The money hole consisted of the conservatorship over Fannie Mae and Freddie Mac, federally chartered institutions headquartered in Washington and chock-a-bloc with the Democratic Party nomenklatura (James Johnson, Jamie Gorelick, Franklin Raines, and Herb Moses to name four). That's K Street, not Wall Street. IIRC, north of $170 bn was pumped into the GSEs. Another $40 bn remains outstanding from the rescue of components of the auto industry, done at the behest of the United Auto Workers and stiffing secured creditors (e.g. bondholders) to benefit the UAW membership.
The one failing investment which did not have a standing Democratic Party client as its beneficiary was AIG. The Treasury and the Federal Reserve lost roughly $23 bn on the Maiden Lane and TARP components of the AIG rescue, a little more than half what it lost on the auto industry and a modest fraction of what when into the maw of the GSEs.
And no, we do not need to be handing out bon bons to business sectors or 'middle class families'. Simple and non-descriminatory taxes structured to hold the impecunious wage-earner harmless should be the order of the day.
Art Deco at May 17, 2014 5:18 AM
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