Bailouts

clax · Oct 9, 2012

David said:
What should of been done: Take the bailout money to bankroll gov't chartered banks. Allow the big banks to fail, and have the FDIC move the effected accounts into the new banks. Once the dust settled, reform the banks into credit unions. Everyone would of kept their money, healthy banks would have existed to fuel the economy and the folks who destroyed the economy wouldn't of gotten $150 million bonuses.

I agree, but the fed would have lost money, I am not exactly sure where the funds come from that the fdic pays out from but I imagine it comes out of federal coffers, why spend your money when you take from the people.

I agree that is what they should have used the system in place to deal with it.

myp · Oct 9, 2012

David said:
What should of been done: Take the bailout money to bankroll gov't chartered banks. Allow the big banks to fail, and have the FDIC move the effected accounts into the new banks. Once the dust settled, reform the banks into credit unions. Everyone would of kept their money, healthy banks would have existed to fuel the economy and the folks who destroyed the economy wouldn't of gotten $150 million bonuses.

A lot of things that don't work with that plan:

1) Nationalizing was not politically feasible and in my opinion that was good. Nationalizing is against a lot of what this countries economic system is supposed to stand for.

2) What happens to the banks' holdings?

3) What do you mean by having the FDIC move the effected accounts to other banks? Most of the troubled banks were primarily investment banks, not commercial banks. They had much more complex and diverse holdings than commercial banks do and it is not like all the money was just deposit money of clients. The FDIC really makes no sense here- the deal with commercial banks mostly... This ties into number 2.

4) And what about the non-banks? i.e. AIG

5) Aside from the huge behemoths that are #2, #3, and #4, you are forgetting the reason why the banks were bailed out in the first place- to stop contagion. You really think nationalizing banks and letting all the investment bank holdings go into bankruptcy would have stopped contagion? I can confidently say no- people might have even worried more as they had no idea what was happening (moreso than what happened).

I think you are forgetting that we had a large issue with investment banks, not commercial banks...

clax · Oct 9, 2012

myp said:
A lot of things that don't work with that plan:

1) Nationalizing was not politically feasible and in my opinion that was good. Nationalizing is against a lot of what this countries economic system is supposed to stand for.

2) What happens to the banks' holdings?

3) What do you mean by having the FDIC move the effected accounts to other banks? Most of the troubled banks were primarily investment banks, not commercial banks. They had much more complex and diverse holdings than commercial banks do and it is not like all the money was just deposit money of clients. The FDIC really makes no sense here- the deal with commercial banks mostly... This ties into number 2.

4) And what about the non-banks? i.e. AIG

5) Aside from the huge behemoths that are #2, #3, and #4, you are forgetting the reason why the banks were bailed out in the first place- to stop contagion. You really think nationalizing banks and letting all the investment bank holdings go into bankruptcy would have stopped contagion? I can confidently say no- people might have even worried more as they had no idea what was happening (moreso than what happened).

I think you are forgetting that we had a large issue with investment banks, not commercial banks...

I completely forgot about AIG, and of course there were others similar to AIG that had similar problems.

I hate that we had to bail them out but I am not sure there was any other option.

m.lewin92 · Oct 17, 2012

Nemo said:
See Post#5, supra.

not related

loureed4 · Oct 22, 2012

1. Okay, we bailed them out because otherwise, it would have been worse.
It was a loan from the government (hence, us, the people) to the banks? , or we gave the money away to these huge banks?

2. Who took off the "Glass Steal" law from 1933 and why? Do you think this is important?

3. Why and who permitted so much leverage?

4. Why we allowed the CEO of Lehman go with an amazing bonus, so, he is not suffering (if only a bit) any consequence. Likely, he will be now in Miami, Austria, in a pacific island, so, he (an others) didn´t suffer

5. Why Lehman Bother didn´t get any bailout , and therefore, investors became mistrustful? Didn´t this event trigger the worlwide crisis? . Why Lehman didn´t get any money as Goldman Sachs, AIG, and others? Couldn´t this have prevented Lehman from failing and therefore, the crisis had been less deep?

6. Can the failure of Lehman spread across all over the world?!!

Dirk · Oct 26, 2012

myp said:
I think you are forgetting that we had a large issue with investment banks, not commercial banks...

Hence the current suggestion that investment and retail arms of banks be separated, in order to avoid such a situation in the future.

myp · Nov 4, 2012

Dirk said:
Hence the current suggestion that investment and retail arms of banks be separated, in order to avoid such a situation in the future.

That alone doesn't remove the possibility of such a crisis again though given shadow banking and the turn in the way investment banks operate.

Dirk · Nov 6, 2012

myp said:
That alone doesn't remove the possibility of such a crisis again though given shadow banking and the turn in the way investment banks operate.

Of course not, but it does diminish the possibility. If banks do not separate, they can be forced to do so by Government, and it will be easier to prosecute those that are breaking the new rules and putting Global Economic Security at risk. While it doesn't safeguard against a similar crisis happening, it does mean that people's savings aren't at risk.

tecoyah · Nov 7, 2012

Dirk said:
Of course not, but it does diminish the possibility. If banks do not separate, they can be forced to do so by Government, and it will be easier to prosecute those that are breaking the new rules and putting Global Economic Security at risk. While it doesn't safeguard against a similar crisis happening, it does mean that people's savings aren't at risk.

Well stated, and in my opinion very accurate.

avenged · Nov 14, 2012

Banks and investments are essential parts of economy I can say they are the heart of it therefore if there is problem with one of them, economy can slow down or collapse as well.

They had to be bailed out when the ciris escalates, but government must regulate them so that they can be immunent to shocks.

But regulation can diminish competition that does harm to people, too. So they may pay the next bailout in advance to the banks. In total we may pay more than in the first case.

tecoyah · Nov 15, 2012

A good evaluation...and though I agree regulation can have a tempering effect on financial activity in this case it seems the only way to stop the kids from sticking a fork in the power outlet.

This country (let alone the World), cannot afford a repeat of short term profit driven mistakes.

avenged · Nov 16, 2012

Of course. I just write how I see the expectable results. A detailed research is needed to measure which solution is more beneficial. Naturally a lot depends on what regulatory decisions will be made.

myp · Nov 18, 2012

Dirk said:
Of course not, but it does diminish the possibility. If banks do not separate, they can be forced to do so by Government, and it will be easier to prosecute those that are breaking the new rules and putting Global Economic Security at risk. While it doesn't safeguard against a similar crisis happening, it does mean that people's savings aren't at risk.

It might diminish the possibility, but I don't know how much risk it really offsets, especially with shadow banking entities. I think there are better solutions to the systemic risk at this point.

tecoyah · Nov 18, 2012

myp said:
It might diminish the possibility, but I don't know how much risk it really offsets, especially with shadow banking entities. I think there are better solutions to the systemic risk at this point.

Please, elucidate.

myp · Nov 18, 2012

tecoyah said:
Please, elucidate.

Better defined and possibly higher capital requirements, a possible Pigouvian tax on certain types of transactions, changing policy to reduce ties between government investment and private investment (i.e. Fannie/Freddie), in general cleaning up the system to make it easier to understand (this involves reducing legal barriers and loopholes), being tougher with prosecuting fraudulent activities (would act as a deterrent for the future), and more that I am probably forgetting right now.

Some of these things are easier to do than others (some I realize are nearly impossible given the political and legal climate).

tecoyah · Nov 18, 2012

I pretty much agree with your recommendations. I might add the needed split between Banking and Wall Street investment..

myp · Nov 18, 2012

tecoyah said:
I might add the needed split between Banking and Wall Street investment..

That's pretty similar to what Dirk said and like I said, I don't know how effective that can be anymore given shadow banking.

Andrew Taggart · Nov 20, 2012

While I lean towards the 'creative destructiveness' argument rejecting bailouts; I've always wondered why governments didn't bailout the debtors (IE customers) of the bank rather than the bank itself. That would have cost the government the same amount of money, just as much 'moral hazard', but would have allowed banks to get lending straight away.

avenged · Nov 22, 2012

Andrew Taggart said:
While I lean towards the 'creative destructiveness' argument rejecting bailouts; I've always wondered why governments didn't bailout the debtors (IE customers) of the bank rather than the bank itself. That would have cost the government the same amount of money, just as much 'moral hazard', but would have allowed banks to get lending straight away.

This idea made me curious. I sumise this is related to the multiplier effect of bank system that multiples the amount of money in economy.

If debtors payed back all the money, the amount of money in the economy would diminish radically and overdemand of money and oversupply of goods could take place and that wolud cause deflation. And deflation kill growth.

myp · Nov 29, 2012

Andrew Taggart said:
While I lean towards the 'creative destructiveness' argument rejecting bailouts; I've always wondered why governments didn't bailout the debtors (IE customers) of the bank rather than the bank itself. That would have cost the government the same amount of money, just as much 'moral hazard', but would have allowed banks to get lending straight away.

I don't think you would raise liquidity as fast if you went that route since the banks would not get that lump sum. Also, logistically it is harder to do. And last, but certainly not least, the banks could actually (and for the most part HAVE actually) paid back the bailout money- that would not happen if you bailed out all the debtors.

Bailouts

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