Despite the problems that happened ($700 billion in debt, 500k+ jobs lost a month for several months in a row, 7-10 million total jobs lost), my understanding from what I know of it is that Bernanke handled the situation fairly well.
So what would’ve happened had things not been handled well? What if TARP hadn’t been passed, and/or if the federal reserve was run by a rabid idealogue (someone like Ron Paul or Dennis Kucinich for example). I remember Bernanke said the world economy would cease to exist in a few days w/o the bailouts, and that Paulson was on his knees begging Pelosi to pass TARP. So I can only assume the issue was extremely serious when people of the caliber were saying and doing things like that.
Would unemployment be closer to 20%? How many jobs would be lost? What would the US and world economy look like? How long would the depression have lasted?
On another note, do the bailouts combined with no new regulations (due to our democracy/plutocracy not wanting to offend the powerful and wealthy) pose a serious risk of another collapse? It seems that with no regulations combined with the assurance of government help then investors will be free to pursue high risk ventures knowing the rewards will be high, but the risks will be buffered by bailouts. How serious of a risk is another economic collapse w/o new regulations combined with a newfound assurance of bailouts?
My understanding is the bailouts were necessary, but I wonder what role it’ll play in taking away the risk in future risky ventures while still leaving the reward. From what little I know if it, it seems nothing has been done to prevent this in the future, and if anything we’ve incentivized it by removing risk.
Bailouts buy time. That’s not to say that bailouts aren’t effective. Such action seems to have a fairly good history.
The question becomes a matter of whether the entity that receives the bailout actually changes and improves the manner in which they do business. Chrysler seemed to be on the right track for awhile then fell back. Mexico seemed successful but who knows on a long term basis. The U.S. banks? Very necessary short term but the ingrained culture seems to indicate that they may not have learned their lesson and are perfectly willing to adhere to the greed that got us all into the mess in the first place. We shall see.
From what I saw of it, there seemed to be a consensus among economists that things could’ve been much much worse than they were. The concept that we barely averted a depression comes up a lot when I read economic news.
Had the bailouts not happened, it would have been chaos for about six months to a year. Liquidity would have completely dried up and unemployment would probably have peaked around 20%. However, the financial institutions that were actually well run would have bought up the fragments of the ones that collapsed and eventually put the pieces back together into a stronger system than the one before. By now we probably would have recovered to about where we are now, but with a stronger system moving forward. Basically, it would have been much worse in the short term, but much better in the long run.
Garula, I think you are underestimating the severity. About a week into the crisis, banks were starting to hold off on honoring Letters of Credit. If that were truely to happen, then the bulk of international trade would have come grinding to halt in a matter of weeks. Seriously, all international trade could have dried up and just imagine what that would have done to every economy. Not to mention that too many banks in the US would have gone bankrupt for the FDIC to support (we’re already at something like 140 banks bankrupt in 2009), and therefore there would have been a run on the banking system and most people’s savings would have been wiped out. We would be in a global cash economy now.
Although residental property is showing signs of life, or at least not dropping as fast as before, also try to imagine the US property market if unemployment was 20%. And because a huge chunk of the US GDP is based on the service economy, what do you think would happen there with 20% unemployment.
We came back from the brink and kudos to the Bank of England for starting off the rescue. Hanky Panky Paulsen gave away faaaaar too much to his alma mater and all of the banks. No arguement there. Makes me sick that AIG paid out 100%. Makes me sick that all the banks are able to repay TARP with some nominal amount of interest. Everyone one of the banks TODAY would be bankrupt if it were not for the FDIC taking all of their worthless bonds and valuing them at par.
I really, really doubt that. Why would a company in a collapsing economy, expecting no bailouts, buy anything remotely associated with a failed company? Everyone would be in ultracautious mode; unwilling to spend more than the absolute minimum. It would have been like the Great Depression; people and corporations would mainly just sit on what they had left, waiting for someone else to take the risk of doing something. Which results in no one doing anything, and the economy stays depressed.
Really; we had the Great Depression, our experiment in “Do nothing and let the magic free market solve everything”. It didn’t work.
A lot of banks and businesses would rightfully and deservedly have gone bankrupt, it would have been bad for a while but after some time more deserving businesses and individuals would have grown up and taken over from the less competent and a more healthy economy would have been the result. Overall it would have been much to be preferred.
Because, as even the simplest economics student should understand, the economy does not simply magically vanish. Most solid enterprises remain solid and even secure their position over weaker competitors. Once prices fall to their new equilibrium state, the eocnomy immediately begins to grow again. Many companies will have cash, and they are rewarded for their diligence (or sometimes luck). They can then acquire lucrative-but-cash-poor assets who did not excercise so much foresight.
Ecept that’s nothing like what happened in the GD. That was started by a pretty standard financial collapse - the kind which occurred fairly regularly in the era. But it would never have been maintained without the active malfeasance of government kneecapping the economy.
IN fatc, we have ample historical evidence of what happens in a financial collapse, and while it is unpleasant, economies can and do rebound extremely well within a couple of (painful) years. The advnatge to this is that it permits incredible growth, much of which is real and permanent.
The impression I got from economists across the political spectrum is that it would’ve been a depression because the collapsed banks would’ve collapsed the credit market and as a result pretty much all trade.
So I wonder what the unemployment rate would’ve been or how it would’ve affected the global economy.
We did screw up the bank bailouts. That us why the underlying problem of foreclosures is taking down banks now. We will end up with about 150 banks shut down this year. They will continue to damage the banks and the overall system until they are dealt with. The understanding was that the big institutions would be saved and of course the good would trickle down through the entire economy. That did not happen because we did not demand they save homes and lend to small businesses. They have not . They have gobbled up taxpayers money like the arrogant pigs they are. We should have taken over a large failing bank (nationalized it) and started to fix mortgages. But we have so much Goldman influence in the banking system, that they bent everything to saving themselves and they are getting back to the dangerous practices that took the world banking system down. They are granting themselves enormous bonuses instead of being in court explaining themselves.
Yep, those bankers sure made suckers out of the politicians, who, as usual were too scared to look beyond the “current” situation to do something really positive.
We could have seen a real and virtuous balancing out of economic “weight” if our leaders had had the courage to challenge the so called orthodoxy.
I thought banks were there to improve liquidity, i.e. for a small bit of interest help others to get on. Instead they ran away with our loot, spent it on junk, pretended it was of enormous value, removed much of its worth in bonuses and then claimed a refund when it was proved to be er, junk! For the rest of us, there are laws against that!
Who said anything was fixed? Everything is going according to plan and nothing has changed either. The same crooks are still in charge and noone has been prosecuted. Everything prior to the financial collapse is still the same after it. Injecting money does not kill the cancer that was there before.
Oh, and look at this from the New York Times:
Banks Bundled Bad Debt, Bet Against It and Won
By GRETCHEN MORGENSON and LOUISE STORY
Published: December 23, 2009
The main summary to me is:
“But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.”
The comments section has me fuming
Speaking as someone who worked in the IT and risk area for credit derivatives at one of the largest financial institutions – it was fraud on a massive scale.
Nobody really believed the risk management numbers for CDO’s were anything more than so many angels dancing on the head of a pin. I’m talking about the quants/mathematicians, the traders and most of all the high level executives at the top of the fixed income food chain.
What they did believe was that bonuses were paid out on an annual basis for performance that was measured largely by sales. Not the eventual value of the trades, which ended up being worthless.
These bankers should be dressed in orange pajamas and sent down to Guantanamo. They are the real terrorists. Not the fake movie style terrorists and bank robbers that the government wants us to believe in – who wear masks and carry guns.
No, these are the real bank robbers who work inside the institution and would need tractor trailers to carry out all the money. Real bank robbers wear suits and have the money transferred directly to their own bank accounts.
What a joke that Goldman pretends to be innocent, and claims to have “paid off their TARP money,” while their biggest creditors – including AIG – were given huge amounts of taxpayer dollars to pay off trades they had with Goldman.
The Goldman bonuses are our tax dollars at work. Plain and simple.
I was a witness to history. I saw it happen. The mathematical models were so complex even the mathematicians made jokes about them.
Well, the joke is on all Americans.
and
In 2006, I worked briefly for JPMorganChase as a low-level banker, a position for which I had to, and did, get my securities licenses.
Within weeks of beginning work, it became clear to me that there was something profoundly wrong with the system. Bankers were literally sent to boiler room call centers, where we were compelled to call “clients” with the most credit card debt and encourage them to take out home equity loans ( which for most meant putting their only real asset on the line ) to pay off the credit card debt, while paying only the interest on the new loan. When I resisted making those calls, pointing out that the debtors were only incurring additional debt and never really paying off the principal, I was roundly derided and treated like a pariah. When I brought abuses to the attention of upper management, such as getting people to apply for loans over the phone without sharing the required disclosure information, I was told “we’ll look into it.” No one did; the practices continued.
I left Chase, after six-months, of my own accord. I just couldn’t drink the Kool Aid, or continue to be part of a process that was so blatantly cynical and unethical. And trust me, everyone involved knew it was fundamentally flawed, and ultimately just wrong. How interesting that we have such a large contingent of people in this country who consider themselves morally superior simply because they practice religion. With our current tropism toward corporate rule( the political definition of which, by the way, is facism ) we need a serious ethical paradigm shift
and
For the longest time, as a UK citizen and resident (legal!) of this country, I have puzzled about why there is so much ingrained resistance to anything that smacks of government control, even for the most sensible and basic services such as public health.
I used to think it was fear of socialism or mid-20th C commie-pinko paranoia, but I now understand.
The American people have no trust in their government, nor any belief that their government will act in the ultimate interests of the nation and its citizenry.
I now understand why. THE AMERICAN PEOPLE ARE RIGHT!
The “reveal” of this financial collapse, and the equally nefarious behavior of Republicans and Democrats in the whole charade, have brought the whole oligopolist banana republic out into broad daylight…
I’m still stunned at my own naivete.
Lo and behold Chicago Boss Mob Obama, Bernanke and Geithner are the crooks running the show. Both Obama and McCain were heavily funded by Goldman Sachs, so if you want to see the real terrorists, destrroying lives, look no further.
We need to take this country back from this two headed dragon called repub / demo. Some people need to go to jail
We could have possibly lost our entire financial industry. Most of the people who hold our money and give us loans would have all went under.
That’s what would have happened if we did nothing. Because we averted that catastrophe does not mean we did not screw up the bailout. The government did not have to save the companies who lost all their money through risky investments. There were other ways of handling the mess, but everyone – including Congress – got scared into thinking there was no way to avoid the collapse of the financial industry without bailing out the people who caused the mess in the first place.
Watch these videos for a better solution to the financial crisis: Part 1 & Part 2.
I watched for about 10 minutes, and saw a suggestion for a publically-funded bank (or banks) that would loan money to to all-and-sundry in much the same manner as Freddie and Fannie underwrote mortgages.
How could such an institution have been implemented fast enough to avert the impending doom?
(Save this summary, it can be applied to all political Great Debates hypotheticals).
Summary:
If we did whatever my political preference/belief system dictates, we averted disaster and the result could have been much, much, worse.
If we did anything else, things would have been much, much better if we’d instead done whatever my political preference/belief system dictates, and it’s only luck that saved us from total annihilation (and that could still happen!).
In either case, the result is self-evident to everyone with a brain.
All they had to do to do the bailouts right is one clause that the money can ONLY be used for loans to customers, nothing else, and we would have had none of the abuses. Why could neither party think of that? (Had to be bribes)
The best idea after the fact was taxing away all the bonuses from anyone getting fed bailout money. It passed the House, then bribes stopped it in the Senate. Has anyone tried an initiative petition, maybe at state level? If you just did NY and CA you would get most of the banking scammers and get money for the states if the Feds won’t do it??? No one can think of that?
At some point in the video it is mentioned that the government should give shares of the bank to the public. Each citizen would get one share worth $1 each. That way it would operated like a privately owned bank.
It seems worth noting that when Paulson originally called for the TARP legislation, he said that it was because to save the economy, the government had to buy up $700 billion in troubled assets, and it had to do so immediately. Then after TARP was passed, Paulson changed his mind. We didn’t need to buy any troubled assets. Instead, it was imperative that we invest the $700BB into the banks directly because we needed them to lend the money out and loosen the credit market. Well, we pumped the money into the banks, but they didn’t lend it out; they just kept it, to shore up their balance sheets.
So, in short, Paulson said, “we need to do X or the economy will collapse,” and we didn’t do X. Then he said, “if Y doesn’t happen, the economy will collapse,” and Y didn’t happen. And the economy didn’t collapse. Which causes me to wonder whether there ever was an actual crisis or simply a panic.
This is not to say that they should have done nothing. But it’s not at all clear to me that the generalized TARP bailout accomplished anything that the previous case-by-case approach could not have.
I’d venture that that was their biggest mistake. They were shoring up the banks to prevent a run on them, which happens when people no longer have faith in the economy.
The strange part was that most of us weren’t seeing this as an economic problem, but just a bad banking problem and therefore expected it to be dealt with appropriately and proportionately. The fact that we ending up ploughing zillions into a corrupted and discredited financial system is what has raised most of the anger in the UK.