Craziness. Sheer craziness.
The bailouts were horribly implemented on almost every level. They were also absolutely necessary.
Let’s get a clear picture of where we are first, before we get into any counter-factual speculation. First, even with the bailouts, credit markets became so tight that we suffered the worst recession since the Great Depression. Driving this process, of course, was the collapse of household balance statements with the collapse of asset prices, most notably property values, and thus the reduction of personal consumption as households attempted to create a buffer against this storm of wealth destruction with more savings. But if everybody tries to do this at once, then we’re left with the paradox of thrift that Keynes described so well so many years ago.
A healthy economy can redirect additional savings into more investment opportunities. But that’s not what we were left with, was it? As I said, we had the bailouts and we were still left with tight credit markets. The lesson is clear: Without functioning financial markets to redirect that glut of savings, all of that money gets stored and gathers dust in bank vaults. This isn’t the result we were looking for, of course, but how in the name of Jesus Fuck Almighty could that situation have been improved if the credit markets were not simply tight, but nonexistent?
Any one of you who doubts that the bailouts, as horribly designed as they were (and I have countless problems with the way they were implemented) should take another look at China Guy’s post number six. International trade depends, in large part, on big name banks guaranteeing payment if and when an exporter ships the goods. If those letters of credit become worthless because big banks like Citi no longer honor them, then what happens? Not just tight credit, like we’re dealing with now, but the total collapse of credit and thus the freezing of international trade. And this was starting to happen. Food shipments were stacking up in ports, not because there wasn’t enough demand, but because the barest amount of trust that there would be payment for those goods was gone.
Market entry is a wonderful thing. When one company falters, another company can step up to take their place. But what cannot be replaced so quickly is trust in the system itself. Once that’s gone, it’s gone for a long time.
Contrary to what smiling bandit claims, the biggest sin of the Great Depression was not active government malfeasance, but the Federal Reserve’s inactivity as a series of bank runs was destroying the American money supply. This process has been explained over and over again on the boards: prices can’t simply drop overnight. Many prices, especially wages, are sticky and resistant to downward pressure, and that’s exactly how deflationary pressure can cut into total economic output instead of dropping prices to a new equilibrium. The process then feeds on itself, and an economy can get stuck in an equilibrium output level far below its potential.
The bailouts were terribly designed, but in the end, they were a success, in that they prevented that vicious self-perpetuating downward spiral. We were left with tight credit instead of nonexistent credit, reduced international trade instead permanently stalled food shipments. We could discuss for hours all of the horrible ways that the bailouts were designed. There should be no debate about whether nonexistent credit markets are somehow an ideal to which we should be aspiring.