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
Because the effects of if we didn’t bail them out would be far worse than spending that money. That money had to be paid back as well
There is a saying… cut off your finger to save your hand. The theory (or what was sold to the American public) was there were several banks where about to go under (a few like Bear Sterns did) which would have caused a ripple effect throughout the economy. The TARP (troubled asset relief program) program effectively allowed capital (money) to flow through the system when no one was lending because of that panic. The panic itself would have froze money lending and caused more defaults then what we actually saw in 2008.
When a business is really important to your economy, it sometimes makes more sense for the government to save it than to let it fail.
You might spend a billion dollars to save a business, but if you let it go bankrupt then you’d lose 2 billion dollars in economic activity. The bailout costs you less money than doing nothing.
Yes, these banks caused the crash. They knew they were taking an extreme risk, and their gamble failed. If the government didn’t bail them out, all of the banks close. An economy can’t function without banks.
the alternative would have been less taxes and more unemployment payments and spread of fear the could undermine more people, companies, governments, etc and make it harder for politicians to get elected
if general motors or Greece goes bankrupt then lenders will fear more likely usa goes bankrupt. so bond rates on usa debt might go up 1%+ a year. 1% a year on 10 trillion dollars (federal debt) is 100 billion dollars every year. on top of federal, are state, city, and public entities like new York city transit.
bond rates go up, deficit goes up, which makes financial shape look even worse and bond rates go up even more.
2008 was before the modern economic Era where countries hopelessly in debt could find people willing to loan money for close to rate of inflation… the bailouts helped inspire the modern “too big to fail and everything else will collapse at same time so who cares” thinking…
Greece bond rates for example climbed to 10% and briefly to 50% but then down to near zero… while Greece keeps getting in worse financial shape thanks to confidence in too big to fail. https://commons.m.wikimedia.org/wiki/File:Greek_bonds.webp
If the companies were not bailed out the *entire* banking system would imploded.
thst would have meant, no banks to put your money in, no ATM cards, no credit cards, no car loans.
literally no banks.
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.
How quickly we forgot the revolving door between Citibank and president Obama. An email from a citi.com address with a list of desired cabinet picks seems a massive conflict of interest. Obama softballing the banks during his first term will always draw question marks.
https://www.truthdig.com/articles/photo-of-the-week-obama-who-let-citigroup-staff-his-first-cabinet-calls-for-voter-solidarity/
The CEOs of the big banks all donate money to politicians. After the crash the politicians assisted their financial supporters.
Because those companies were deemed “too big to fail.” A rather misleading turn of phrase, because it doesn’t imply that a company is too big and successful to fail.
It actually implies that a company has grown so big that it is, more or less, integrated into our everyday lives. Therefore, the disappearance of said entity, would theoretically cause major disruptions with how we, as a society, behave and operate.
I don’t like the idea of a multi-billion dollar entity getting a bailout loan from the government. But you want to know what I dislike, even more? The idea of a society that has to experience the fallout from, let’s say, an international banking failure.
There was a day short term lending for large corporations froze. That’s the shit that makes your paycheck work. Imagine your boss said, “We can’t write checks anymore because the most basic, safe banks are no longer sure it will work. Our business is actually totally soild, but I’m going to need you to work without a paycheck for a few weeks while we build a vault, hire some security guards, and tell our customers they need to start paying us with cash (so we can give it directly to you).”
You then go to the grocery store. You do a double take, why is there a long line at the ATM? Why are there multiple security guards guarding the ATM? You go to buy beans and, WTF? Cash only? Oh the grocery store is building a vault for cash where the ice cream used to be? You go outside, no line at the ATM? It’s out of cash? You mom calls, “Have you gone to the bank yet? They’re all running out of cash!”
Panic sets in. No paycheck. No cash. You have no way of buying food and no idea when you will be able to.
Hence, every country in the world did some version of We the Government are good for it, here’s some electronic money so that paycheck works.
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