The Wisdom of Bailouts

Thanks goodness we bailed out Bear Stearns back in March if we hadn’t we might have lost Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch and who knows what else.  Oh wait…

Comments

But I thought all the economics bloggers said banks were in a different category from the rest of the economy. Thousands of businesses go bankrupt every year, and that's supposed to be a good thing (creative destruction, you know). But banks have to be rescued by the taxpayers to protect the 6-figure pay of their employees, all of whom have educations and therefore are equipped to compete in the global economy.

Too bad we all couldn't have been so sure of what was going to happen back then. Whats it about the quality of a future, not how accurate it is but which side of the market it is on...?

"So, things would have been better had we not "bailed out" BS? Got any evidence for that?"

....I doubt things would have been better. Because it took years to build up the things that brought down Fannie and Freddie, etc. It's not like a non-bailout would have forced the rest of the sector to shape up to avoid failure. Because we've been just facing fallout for the past year. I don't they could. If they knew they wouldn't be bailed out--and found out in March--they just would have failed instead.

If Bear had failed a couple years ago, and not been bailed out, then maybe the rest of the financial sector would have shaped up, but I think by March it was too late.

It's hilarious. Tyler is hand-wringing over posting and Alex tosses up a sarcastic one-liner.

We haven't had any major terrorist attacks lately. That must be because we invaded Iraq.

Noone, at least in government, is willing to set themselves up with falsifiable predictions. They get to claim victory either way it goes. This is smart, but not too admirable. Private firms, on the other hand, roll the dice and win or lose.

I don't know what Alex's comment was about the housing recession not being too bad, but he's right. This whole thing is such comedy. Who can lose their shirt buying homes? Well, you can if you assume something relatively safe is ultra-safe and then lever up. Who could have predicted that these institutions could have taken a haircut and turned it into a beheading. Of course, the ones who did predict it (not me, btw) were called Cassandras and now they are called Polyannas with reference to the crisis.

Re "things would have been better." Wouldn't the public not being on the hook for Bear Stearns debt be considered better?

Bailing out Bear Stearns bought invaluable time. The markets have had six months to digest, ruminate, hedge, get used to the unthinkable becoming the probable, whatever. It seems to have helped: Lehman has gone bust without any bailout and a drop in the S&P 500 (as I write this) of about 1.5%, which is indistinguishable from what passes for normal market volatility these days. If Bear had been allowed to go bust back in March, with March's mindset and unpreparedness, I guarantee the consequences would have far, far more severe.

We can already declare Operation Let Lehman Die Already an unqualified success. Congratulations to Paulson who had the nerve to call the market's bluff.

The next time bomb is AIG though, and that will be a very big problem indeed. Back to work.

I used to think that this was a free-market oriented blog. From reading the comments here it's become obvious that my thinking was wrong.

It think Lew Rockwell sums up this whole mess quite well:
http://www.lewrockwell.com/rockwell/imperative-sound-money.html

Econ 101 Pop quiz

Citing references from your textbook by Mankiw, please explain the justification for:

a. having the taxpayer bail out Bear Stearns
b. Wall Street bail out Merrill Lynch and
c. letting the invisible hand take care of Lehman Brothers

Extra credit if you cite Gary Becker, Dick Thaler or Vernon Smith!

I would like to see an economist study how much the stock market is currently being propped up by automatic 401(k) contributions.

What has bush done about this economic crisis?
With Websites like http://www.FAKEPAYCHECKSTUBS.com promoting the fact that if you buy their $50 program you can get any loan you apply for, Is it really any wonder why the banking system is in the turmoil it is in today? I have read that using this "Novelty Paycheck Program" was standard practice by Greedy Loan officers trying to push the loan through so that they can make the 6 percent commission on every real estate transaction! SIC


a drop in the S&P 500 (as I write this) of about 1.5%

Wouldn't you know it, 11:00 am marked the intraday high (apart from a brief period at the start of trading, see graph [link meaningful for today only]), and the S&P 500 finished down about 4.3%, ending the day at its lowest point. Not a Black Monday, but a pretty bad day nonetheless. We had 3% and 3.5% days in the past two weeks, this topped that.

Here's Senator McCain's statement: (http://thecaucus.blogs.nytimes.com/2008/09/15/obama-mccain-weigh-in-on-wall-st-turmoil/?hp)

“My opponents may disagree, but those fundamentals – the American worker, the innovation, the entrepreneurship, the small business – are the fundamentals of America and I think they are strong,† Mr. McCain said. “But today, are being threatened today – those fundamentals are being threatened today because of the greed by some based in Wall Street and we have got to fix it.†

So yes, if you choose a sufficiently motherhood-and-apple-pie meaning of "fundamentals," they're in great shape. Never better! And less cynically, there's important truth in the four elements that the Senator pulled out -- it's just that the history of the last 150 years shows us that all this is not immediately helpful when the financial system seizes up and liquidity outweighs all else.

I leave it to others to ponder the ironies of the accusation about Wall Street greed.

I'll take a Bernanke Put for $1000 Alex. Oh, make it a daily double!

"I find Bush and McCain's statements counterintuitive, given the failure of LB, the bailout of BS, the problems AIG is having, and the purchase of ML"

My estimation is that these institutions are not the real economy, in fact, quite the opposite. What Bush and McCain are saying is kind of like what would have happened if there actually were WMDs in Iraq. They would have been correct, but despite themselves.

Chris Durnell: Thanks for the correction.

Hi - I don't understand the 9/11 reference. I just think it would be interesting to know how much worse the Dow would be right now if it weren't for the twice-monthly injections of capital from individuals in the form of automatic 401(k) contributions.

I'm early in my retirement savings, so I would actually prefer the market to drop more than it has.

Did a post on the current financial meltdown.
Comments welcome :)
http://skuvce.blogspot.com/2008/09/on-financial-meltdowns-frederick.html

The larger point - to me at least - in letting BS fail would have been to signal to all and sundry that YOU'RE ON YOUR OWN.

It would have forced Lehman to do more to shore up its positions earlier. Dick Fuld thought he could ride it out. Obviously he couldn't have been more wrong.

It would have spurred Merrill to seek an alliance earlier - instead of being bought outright. (Though MER seems to have gotten off pretty light from this.)

It would have alerted AIG to what's coming down the pike instead of this last-second posturing for tens or (last count) hundreds in billions of capital for collateral. AIG's soon to be toast.

Last point: why are these ratings agencies still in business? It is they who caused a lot of this and they who will cause AIG to go belly up.

Today the markets dropped again. Over 300 points. Congress (under the republican majority) passed a law making it more dificult for average Americans to declare bankruptcy. Now.... because of Republican deregulation, Banks and investment houses have or are currently declaring bankruptcy or are close to it. Who does the government call on for help??? Us... The Average American citizens who losing our homes, jobs and life savings. WHAT IS GOING ON IN THIS COUNTRY???
I think it's about time we all woke up and realized that first of all, Washington is neither on our side, protecting our rights nor is it our friend. They are always siding with the wealthy. I'm totally disgusted and I also refuse to vote for either of the two parties.

When Bill Clinton eased banking restrictions in California, he also dished out $8-billion dollars for "community redevelopment loans.† Of course, the money would never get paid back. Undoing regulations sets a precedent, as does "comping" real estate. With the influx of cheap capital, properties already overvalued at $125,000 inflated to $525,000. Enter, "creative financing.† When the schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left bankers around the world in the lurch (see global economy). Never mind that the aforementioned demographic is the new face of the Democratic Party; because of rampant “creativity† and subjective prices, Congress simply cannot determine the worth of the financial instruments. It’s a $90-billion bailout at best. But if you want to thank someone, thank Hillary Clinton. She knew all along who’d get the loan giveaways; she knew whose votes she’d buy. It was a blank check. So, why should hardworking Americans bail the housing bubble? Let the Dems pickup after themselves, let those 18-million cracks pass the hat: http://theseedsof9-11.com

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