The whole financial crisis and bailout is a sad commentary on our two party system of democrats and republicans. Without a doubt the housing bubble was caused by the collective actions of both these parties and worse still the blank-check bailout solution pursued was clearly not the product of objective thinking or for that matter even really represents a solution at all.
O’bama credits Bernanke for staving off the second great depression by socializing the losses of major banks. But that is not necessarily true. One option was to take the banks into receivership thereby effectively asserting complete financial control over the bank. The FDIC does it all the time (and has done it time and again very recently, (Shiela Baird I love you)).
How can you claim that you avoided a run on the banks, liquidity, credit crisis, etc. by having the government bailout the banks – very generously – the alternative was to formally extend the full faith and credit of the entire government via receivership?
The contention that proceeding with anything further than a blank-check bailout would have given the markets the appearance that something was drastically wrong is dumb. That shipped sailed when Lehman Brothers slipped into bankruptcy. The market psychology behind an initial shock and subsequent reinforcing events is different. The surprise response of the initial shock makes it much more severe. There was no legitimate reason for not proceeding with receivership. In fact, Bernanke could have announced it as a stipulation, or pending determination, to the exact same bailout package they offered. But he didn’t even negotiate that much. This at a time when the Banks were clearly at their weakest.
Also, I can’t seem to shake the nagging doubts about how bad things really were. I’m not saying there wasn’t a problem. But as we all know, AIG through a party, obscene bonuses got paid, and a host of “other investments” were made. Then there is Phillip Swagel’s recount of the events of October 13, 2008. Swagel was then Treasury Assistant Secretary [Note: that Timothy Geithner’s, then Federal Reserve Bank of New York, fully participated in designing the bailout with Ben Bernanke, then Federal Reserve Chair and Treasury Secretary Hank Paulson]:
“This had to be the opposite of the ‘Sopranos’ – not a threat to intimidate banks but instead a deal so attractive that banks would be unwise to refuse it.”
Authors Simon Johnson and James Kwak in their book “13 Bankers” go on to explain:
“the government had to offer attractive terms because it could not force the banks to agree to any investment, and it is true that some bankers claimed that they did not need government capital. [Eric Dash, “Bankers Pledge Cooperation with Obama,” The New York Times, March 27, 2009, available at http://www.nytimes.com/2009/03/28/business/economy/28bank.html]
Paulson (former CEO of Goldman Sachs), Bernanke and Geithner were essentially pushing free money at the Wall Street banks.
In the end, what Bush and O’bama chose to do:
1) compounded the moral problem stemming from “being too big to fail”,
2) by socializing losses, ran contrary to the very premise our capitalistic society in which those who take the risk get the reward or suffer the losses, and
3) left poor managers in charge of the largest industry in America.
America currently does not have a well functioning financial sector. What is more, America’s financial industry continues to be a drag on the countries overall economic performance.
This time the solution was “trickle-up” economics. More money should have gone to the stimulus.