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
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.
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