Is it a bad thing if our banking system collapses?
In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer.
The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.
But even as the fates of Lehman and Merrill hung in the balance Sunday night, another crisis loomed as the insurance giant American International Group appeared to teeter. A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.
The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.
This is, of course, all the fault of the liberals. If they would just force people to deal with the consequences of their actions rather than giving them a safety net to fall back on, people would work harder.
Kidding! You’ll never see an argument like that from the right. Why, it’s expected that we’ll bail out the billionaires. Gotta do it, the economy might melt down otherwise. It’s the poor who have to be dealt with harshly. They don’t have lobbyists.
This is, of course, an unmitigated disaster. The Fed has already spent billions bailing out bad actors in the economy, and they’re at a point now where they really have to keep it up in order to keep the banking system from collapse. Of course, all these banks were unregulated, and in principle that should mean we let ’em fail — you see, unregulated markets operate with no safety net. Regulation gets the government involved, but it adds in a safety net — think the FDIC, for a good and positive example.
Nouriel Roubini thinks the Fed has to stop bailing out moral hazards. They do, but they probably won’t start now. In a just system, we’d let the billionaires go under here, and pick up the pieces afterward. But instead, we’ll whine about how the Democrats want to slightly raise taxes on the rich and add a few *shudder* bureaucrats to look into what the banks are doing, because that’s just terrible for our free market system. And so it goes.
Jeff:
Kidding! You’ll never see an argument like that from the right. Why, it’s expected that we’ll bail out the billionaires. Gotta do it, the economy might melt down otherwise. It’s the poor who have to be dealt with harshly. They don’t have lobbyists.
– – – – – – – – – – – – – – – –
…. and I’m sure that moral certainty makes you feel all warm and self-righteous.
But in fact many voices on the right – and on Wall Street! – strenuously objected to bailing out either investment firms OR the Fannie-Freddie monstrosities.
Including this guy:
March 25, 2008
McCain Warns Against Hasty Mortgage Bailout
By JOHN SULLIVAN
Drawing a sharp distinction with the Democratic presidential candidates, Senator John McCain warned Tuesday against hasty government action to solve the mortgage crisis, saying “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”
“Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy,” Mr. McCain said, speaking before a business group in Santa Ana, Calif.
Mr. McCain did not rule out a bailout, instead saying any such aid should be temporary and “no assistance should be given to speculators.”
– – – – – – – – – – – – – –
Notice the dateline – and more recently:
We’ll Protect Taxpayers From More Bailouts
By JOHN MCCAIN and SARAH PALIN
September 9, 2008; Page A25
The bailout of Fannie Mae and Freddie Mac is another outrageous, but sadly necessary, step for these two institutions. Given the long-term mismanagement and flawed structure of these two companies, this was the only short-term alternative for ensuring that hard-working Americans have access to affordable mortgages during this difficult economic period.
We are strong advocates for the permanent reform of Fannie and Freddie….
Treasury has broadly followed the McCain plan, outlined months ago, and gets at the short-term heart of the problem. That plan…. replaces management and board members. It requires that shareholders take losses first. It puts taxpayers first in line for any repayments. And it terminates future lobbying, which was one of the primary contributors to this great debacle.
– – – – – – – – – – – – – – – –
That last one appeared in the Wall Street Journal – the house organ of America’s fiscal conservatives – and garnered lots of supporting letters.
links:
http://www.nytimes.com/2008/03/25/us/politics/25cnd-mccain.html?_r=1&adxnnl=1&oref=slogin&pagewanted=print&adxnnlx=1221469597-SATmFEjwdtzTtoZ9Fw9IhQ
http://online.wsj.com/article_print/SB122091995349512749.html
“In a just system, we’d let the billionaires go under here, and pick up the pieces afterward.”
Best I can hope is that we’re sacrificing justice for efficiency and that doing it this way minimizes cost and pain in the long run.
Lehman Brothers filed for Chapter 11, so we’re letting some justice happen.
I’m not a happy camper about this. It does seem as though we (and I mean you and I and every other taxpayer) are getting stuck with a bill while the guys who made all these bad loans ride off into the sunset with millions in bonuses, etc.
I’m not clear on the concept. At all. Supposedly it’s because a great many small investors would find themselves ruined and smaller businesses would find that the loans they need to work would become unavailable, putting people out of work yada yada yada. I don’t pretend to know the details. But a bunch of people played fast and loose with other people’s money and are getting off rather comfortably free by my standards.
I work for a large financial institution and I can guarantee that banks are highly regulated. There are a number if institutions under the Treasury Department whose sole responsibility is to examine financial institutions in accordance with a series of regulations. My job is to see that our examination goes smoothly and to advise IT on regulatory compliance. (google FFIEC for details on banking regulators)
What frustrates me about this whole situation is that it is a confluence of bad decisions. Yes, banks and mortgage lenders were happily handing out loans to many people, and many of them loosened their appraisal, approval and documentation requirements in a quest to get the most loans.
Playing with them were people using the equity in their homes as a cash cow to pay off credit cards, do home improvements, buy extra cars with HELOCs and cashed out equity from refinancing. Then there were people buying homes they couldn’t really afford. All the while the Bush administration is telling people to “Buy! Buy! Buy!”
I think it’s simplistic to turn on banks and tell them it’s all their fault, when every one of those people who is now defaulting on their mortgages chose their home, saw the terms of the loan and signed the paper anyway.
Did banks take advantage of the housing fever? Absolutely, and believe me when I saw they are paying for it. It’s so much easier to say “the bank took advantage of me when i bought a house that i couldn’t afford” than it is to admit to getting caught up in making a fast buck by buying a house and sitting on it for a year or two just to sell it for a profit.
Oh and don’t get me started on the securitization of mortgages, let alone the emotional instability of the stock markets. Nothing but a whole stack of actors under the illusion that land and houses always appreciate in value. That bubble burst.
“Is it a bad thing if our banking system collapses?”
Well, let’s put it this way, each one of those dollars lost represents at least $1 of tax writeoffs. Also, most who lose their jobs stop earning significant taxable wages. Further and as we saw in the post-9/11 slump, many newly jobless will decide that their afflictions are severe enough to seek disability from Social Security. All of these circumstances have their own set of ripple effects.
From another perspective, most banks over 5 years old have some exposure to high risk mortgages and are in a position to make just the safest of new mortgages. Only the newer banks without high risk portfolios can compete for the normal risk market, but being new, they are not yet showing a profit and are undercapitalized to fill the entire void. This will tend to push lending rates up.
Bush’s enduring legacy will most likely not be his disastrous management of the Iraq war but this economic sinkhole that widens with each passing week.
Bailout advocates will go about touting the genteel hostage line they usually do.
As if we still had any pension funds left to lose.
What makes me mad is that you could get the same large effect (placate bondholders, slow economic slide, keep cash circulating through the system) from the bottom up; just have the Fed pay the mortgage of a large proportion of at-risk mortgage holders for, say, 6 months. Same amount of cash goes to the banks, reinsurers don’t lose their shirts, fewer homeless people, more cash spent on everything people buy (food, energy, schoolbooks, you know.)
But *that* would be welfare and bad for people’s characters and supporting the undeserving, and this is just good business practice. It’s infuriating.
This is a pretty good explanation of what the FED did and why.
http://freakonomics.blogs.nytimes.com/2008/09/18/diamond-and-kashyap-on-the-recent-financial-upheavals/