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
The companies didn’t “get off scot-free.” They paid huge fees and interest payments and became deeply indebted to the federal government. Or at least that is part of the narrative.
Because they have friends in high places that got some of that money as well. You just have to create a story for the masses that their future and their current standard of living is dependant on these bad, poorly run companies staying in business.
Because the politicians and money managers are symbiotic. The financial regulations that directly led to the collapse were loosened in the 90s, directly benefiting financial firms and fucking over lower income Americans. Then when the money managers overdid it and caused the collapse, their political buddies bailed them out again.
In short, banks were bailed out because the entire financial system had very nearly collapsed. Had that played out without government sized intervention, the results would have been catastrophic.
Banks make money by lending out money that other people deposit with them. And most of the economy works because banks make it efficient to manage and use money. If banks suddenly disappeared, most of the economy would just stop. The bailouts were to prevent that.
Now there are tons of fascinating reasons for how and why this all happened. But they’re complex and elaborate. The best reason to think that that is exactly how it would play out is that it actually was happening. The situation was so dire that within days of the crisis starting, banks had largely stopped lending.
If your bank collapses your savings go with it
pensions, life savings wiped out;
financial reserves of your employer wiped out
The FDIC can provide protection but not completely so prevention is critical
that has disasterous knock on effects for, well, pretty much everyone
Bailouts protected the people, by rescuing the bank
The whole economic system was in an extremely fragile state. The companies deserved to fail, but they’re too big in the sense that it will have a huge effect on individual non-rich people. It’s easier to stabilize what mess we had than to try to fix the mess while preventing other disasters. Literally everything in the economy was wrapped up in this handful of banks and companies in some way.
It’s kind of like the stimulus checks during COVID. They are a blunt instrument that caused a lot of bad things. But it was also much easier to manage than hundreds of individual programs targeting actual specific needs – it would have never gotten accomplished before it was too late to matter.
The companies that got bailouts were huge financial institutions that the economy as a whole depends on. If these banks hold a large proportion of business’s and individual’s money then those businesses and individuals are going to be hurt by them going under. Especially considering that because banks operate on the model of fractional banking, all those parties are going to lose a lot of money by the banks going under. That is banks don’t actually have all of everyone’s money on hand to pay everyone out who holds accounts there. Those last two sentences aren’t exactly ELI5, but it’s an important concept.
This is the gist of it. There’s a lot more debate about the way things are, and there needing to be better safeguards, but that gets more involved and complicated.
I think the proper question is why weren’t any companies/people held accountable. Capitalism on the way up and socialism on the way down.
We gave all the banks bailouts and then president Obama directed his Department of Justice NOT to investigate any of the banks or bank executives for their brazen crimes. 5 million American families lost their homes and Black wealth was virtually wiped out. But 45ers think he was a socialist. 🤷🤬
The tl;dr is the banks that were going to fail were so large that insolvency would cause other banks to become insolvent. They owned “toxic assets” with hugely inflated price that would have had to been sold. This would have created a domino affect in the market and basically every bank would have failed.
Imagine you wake up tomorrow and not only is every investment fund locked – everyone’s bank accounts are unreachable as well.
That’s what was likely to happen if we didn’t give them loans to shore up their books.
Latest Answers