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
Will try to approach this non-politically.
Banks are kind of the “lubricant” that’s helps the financial system run smoothly. Businesses and individuals can get help from banks for loans, credit cards, and a safe space to store money. Some banks will also work with other financial institutions (banks, hedge funds, etc) to move financial instruments around.
Pre-2008 banks took on a lot of risk. They didn’t follow good practices and used lax regulations in an attempt to make a lot of money. For example, they gave mortgages (house loans) to people that couldn’t afford them. These loans were structured in a way that people paid less per month and as time went on they paid more. Eventually they could t afford their houses.
When people can no longer afford their loans they don’t pay them back. This hurts banks, too. When this happens on a large scale the “lubricant” of the financial system starts to dry up which makes getting loans and other financial services more difficult.
Some banks were hurt really badly and started to fail. Banks that we now call “GSIBs” or “Globally Systemically Important Banks” were on the verge of being insolvent (they didn’t have money to pay their obligations.) This would be really bad as people who have money in banks may not be able to withdraw their money, or we have “bank runs” where people all at one time try to take their money out of the bank.
These “bailouts” of certain banks was a successful attempt prevent the entire financial system from collapsing in on itself. While these banks are independent of each other they all work together and have billions of dollars obligations to each other at any given time. So an otherwise healthy bank may become insolvent when their peer banks can no longer pay their obligations to each other.
Essentially, if the bailouts did not happen there likely would have been a large scale collapse of the global economy. Many more businesses will have collapsed, car loans, mortgages, credit cards and other financial services would largely collapse. We would have lived in another “Great Depression” but on a larger scale.
These banks did not get off “Scot free” depending on how you look at it. Banking regulations have dramatically increased via the Dodd-Frank Act. The US Govt for example actually made a profit on bailing out the banks. The bailouts were contentious for multiple reasons as the optics were the government was bailing out many of the same institutions that caused the Financial Crisis.
Some argue (and argued) at the time that the government was feeding “moral hazard.” Moral Hazard is an economic term that implies government action, like bailouts, can cause excessive risk taking because institutions believe they will get saved if they begin to fail.
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