Didn’t some of these companies cause the crash? Or at least help it. Feels kind of unfair that they get off scot-free.
What would have happened if the government didn’t bail them out? Would we ever recover?
In: Economics
Fear of contagion.
Personally , I think too big to fail is a problem that Washington lacks the will to tackle and it only gets worse.
They were deemed too big to fail. Basically, they’re so big that if they failed it supposedly would have been catastrophic for the economy.
I believe the bailouts weren’t free money, more like loans.
The companies had to eventually pay back to the government with interest.
A pipe bursts in your house. You can call a plumber out to fix it and it’s expensive but it solves the problem. Or you can just let the pipe spew water into your house and ruin your house entirely.
Banks are mostly interconnected and lend to each other, and make deals with each other. If a large bank collapses, it can’t pay what it owes to other banks on trades made with those banks, so even deals that are profitable for other banks are now not only not profitable, but lose the amount invested into that trade. Now you have banks that are otherwise healthy failing because they can’t actually collect on their outstanding deals.
The risk is that if bailouts didn’t happen, enough banks fail to start causing a domino effect, and other banks fail. Enough banks fail and the entire economy stops – how do businesses who rely on these banks operate when their banks cease to operate? If bank of America fails, my bank can’t pay payroll, can’t finance a lot of deals we normally would, can’t make or receive payments. If every other bank fails, we have no alternative, either. Our company goes under – and we’re a multi billion dollar company. This repeats all through the economy.
The choice was bailouts or a great depression that would likely have lasted a decade or more.
Its a common misconception as to what the bail out actually was. It wasn’t free money, it was a loan. The banks took the money and paid it back with 10% interest. The precarious state that the big banks were in made it too risky for any other entity to loan them that money, so in that sense getting the loan from the government was a bail out, but the money was paid back with interest. The reason the government didn’t just let them fail was due to the downstream impacts it would have on the companies that rely on investment banks to do business (which is basically every major company in the Country).
Some did – and some were allowed to fail. But there was going to be a huge systemic risk.
The vast majority of the bail out were in the form of emergency cash loans for which the government took shares and assets as collateral. The loans were, in fact, paid back to the government and the US government actually made a profit from the TARP (bailout) program. So the companies did have to pay for their rescue and the government came in as a rescuer of last resort (for a fee!).
Why would we want companies like car companies etc (who had nothing to do with the liquidity problem) to fail simply because their banks stopped working. If you allowed the banks to fail, you’d need to set up another bank all over again in order for the financial system to function. In the mean time, tens or hundreds of thousands of workers are left without pay or without a job until a new bank is formed. This ties up all that operational ability, business contracts, loans (consumer and business) loans in court hearings and liquidation processes for years.
It isn’t actually clear what, other than some odd sort of vengeance, good comes out of NOT doing the right thing by rescuing the economy. It is like having a neighbor you don’t like having a home fire and watching it as it burns and spreads to yours, then saying “good. we don’t want fire fighters. didn’t like that guy anyway”
“It’s a big club, and you ain’t in it.”
You live on a large street of townhouses. The people in the middle house play around with fireworks and gasoline and set their house on fire.
Do you let the whole street burn down just to teach them a lesson? Or do you put the fire out and repair the damage?
The Troubled Asset Relief Program (TARP) was a firewall. And it was not free money. In the end the taxpayers made $15.3 billion in interest.
Yes, very few people were held responsible. But that is the failure, not stopping the fire. In fact other countries at the time were criticizing the US for not bailing out the economy further than they did. They didn’t think it would be enough.
If they didn’t get bailed out you’d be jobless (not you in particular but maybe you). A big bank fails to pay what it owes to other banks and they all fail, they fail and now companies who had money in them don’t get their money back and oh well they fail as well, mass layoffs everywhere as companies don’t have cash to pay its employees… I can keep going but basically the economy crashes.
SsLet me put it this way in remembering the numbers cause I’m too lazy to look it up. For every employee GM has, there’s 7 others in the Midwest for suppliers. Transportation etc.
GM employs like 50k people. Together that’s about 400k jobs that go away if GM goes away. Can you imagine what the Midwest economy would look like if 400k jobs go away overnight? That’s not even counting Chrysler that was also about to fail.
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