Instead of bailing out the institutions, why didn’t the government just let them fail and give the money directly to the people hurt by the bank’s mismanagement? Why were the banks’ protected? Doesn’t this kind of protection incentivize banks to act recklessly in the future?
In: Economics
Money at the “you” level is important because it represents your ability to purchase goods and services. Money at the bank/national government level doesn’t really work like that.
Money does not make things come into existence. If you walk into a store with $100, $100 worth of stuff does not magically materialize for you to buy. What makes that $100 worth of stuff is people – people who made that stuff months ago in anticipation of you walking into the store with your money to buy it.
What money does at the bank/national government level is to provide a means by which people can exchange labor for things and vice versa.
The 2008 bailout did not involve the government “giving” anyone money. There was a short term disruption to the normal flow of money in the economy that, due to how banking regulations worked, meant that a number of banks were technically operating illegally as they didn’t have enough cash on hand (even though they would have enough cash on hand to function normally once the short term crisis was over).
Closing down those banks would have wiped out trillions of dollars in bank deposits. In that case, the disruption caused by so much money being lost at once would have destroyed people’s ability to exchange labor for things and things for labor. That doesn’t mean that human labor or things would stop existing, but without a means to trade those human civilization would simply stopping working.
Cashing out the bank deposits so that nobody lost any money would have required printing trillions of dollars. Similar money printing was done on a smaller scale during COVID, and most of the economic problems in the world right now are a direct result of that much smaller episode of money printing.
So instead of shutting down the banks and destroying civilization, the government just “loaned” what was basically fake money to the banks so that they were technically operating legally, then waited until the crisis was over and said “the fake money we made up to pretend that the banks weren’t illegally operating a few months ago no longer exists.”
There were some companies that legitimately got “bailed out” – like GM. The problem is that bailed out is an overly simplistic phrase for what happened. What really happened with GM was that the government took ownership of it and subsidized it until the crisis was over. Anyone that was an owner of GM pre-crisis lost the entirety of their ownership in the company and received nothing in return.
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