Help me understand bailouts

[fuji]

What's wrong with a bank going out of business?

It depends on which bank. Depending on the bank it may not matter if "a bank" goes out of business.

If Bank of America, Citibank, Morgan-Stanley, or JP Morgan went out of business that is a different issue. Worse if they all go out of business.

The fundamental issue is that the banks are illiquid: The losses on mortgage securities, and other securities, are large enough that the banks capital ratios fall to the point at which they cannot afford (or are not allowed) to lend money to anyone.

At that point the bank may "survive", maybe several of the strongest banks will "survive", but if they are not lending any money, if they are ALL not lending any money, then you get into those crazy scenarios I mentioned.

If a logistics firm that has been contracted to unload a freighter cannot raise funds for payroll from ANY bank, then the goods are not unloaded from the ship. The economic "paper loss" that used to sit on the banks balance sheets as a pseudo-imaginary number has been transmitted into the real economy and cause da work stoppage.

At that point REAL production falls, and we move from paper losses, to an economy that is simply not producing as much, producing less efficiently, and the direct consequence of that is that real goods become scarce: The wheat that rotted on the container ship is not provided to people to eat, for example. The jobs attached to unloading and selling that wheat disappear and those people join the ranks of the unemployed, for example.

That's capitalism, no?

That's a variant of capitalism, yes. It's a variant in which market failures are common, and suffering is extreme, in which economic bubbles burst and devestate people's lives. Some people will actually die.

It is also capitalism to have a regulated banking system, to force compliance, inject liquidity, and have a government that actively intervenes in the economy to prevent the worst things from happening.

We had that sort of capitalism from the 1940's through to the 1980's, it was still capitalism, and we enjoyed the highest rate of growth we have ever had under that style of capitalism.

In the 1980's we shifted to this other kind of capitalism, with more "deregulation", and the consequence is that we have wound up with an extremely fragile system which, when it breaks, is going to break in a very, very bad way.

Joe Forklift will loose his house, so what? He took on too much debt in the first place. He will move back into an apartment living within his means.

If that was as bad as it got, that would be fine. It has the potential to get MUCH worse than that. If there is a complete failure of the financial system it would not be hard to imagine 25% or 30% unemployment and at that point you have real misery for a lot of people--including a lot of people who minded their own finances properly.

 

[fuji]

Why aren't any banks who got part of that 700 billion bail out money loaning some of the money out now?

Honest answer?

Because 700 billion is pocket change compared to the scope of the problem the economy is facing. Even with the 700b it is going to get a LOT worse before it gets better. The goal with 700b was not to avoid a recession; the goal was to avoid a nasty depression. It is not yet clear that the United States has the financial resources to deal with this, even if all available funds were spent on it, it might not be enough.

The recession is going to be long and deep and is already baked into the cake--there is no avoiding it. The goal now is to avoid much worse than that.

There are some financial experts, economists, etc., who think the current crisis has the potential to be much, much worse than the great depression. Nassim Taleb, for example, thinks the current crisis is the greatest threat to the United States since the American revolution--that the stakes are about that high and that there is a very real possibility that we are facing a TOTAL collapse of the economic system. Not just banks. Total.

In other words, that the actions being taken now are not to mitigate the downturn, but to try and arrange for the survival of the United States as a meaningful entity.

 

[fuji]

If you watch some of the economists talking about this on the news you will hear over and over again the interviewer asking questions like "so how bad can this really get" and such, and the economist will look a little shifty, and give some sort of non-answer.

That's because they don't want to scare people.

This could get really fucking bad. Bad as in the agrigultural system failing, stores running out of food, profitable businesses unable to operate in a meaningful way.

That bad.

That outcome is not a certainty by any stretch of the imagination and can hopefully be avoided--but it is a real possibility, and that is what the 700b is trying to stave off.

The best possible outcome is that we see 9-10% unemployment and one of the worst recessions in memory. That is the good outcome that the interventions are trying to achieve.

 

[Bear669]

Excellent comments Fuji

Perhaps some bankers and insurance execs should be shot- but financial companies MUST be bailed out when there is a panic. They are hugely interlinked (even back in 1929 it was a problem- and its far worse now). A true "run" on a bank can be utterly irrational- and is virtually unstoppable.

It was likely a mistake to let Lehman crash, though they were not a bank in the conventional sense.

Even though they can be bureaucratic and arrogant- hurray for the Canadian banks & regulators.

 

[fuji]

It's possible to bail out the company while punishing the managers. The government can and should simply nationalize the failures, send their stock prices to zero, but keep the institution afloat.

 

[crystalpalace]

It's possible to bail out the company while punishing the managers. The government can and should simply nationalize the failures, send their stock prices to zero, but keep the institution afloat.

Viva La France!
Oops, but even France, with nationalized banks and insurance companies, facing a huge threat.

 

[a 1 player]

Fuck all of the bailouts!

Let the whole damn economy crash and there be a massive depression. It might take a few years but it will recover, it always does. Maybe then business will wise up for another 80 years.

I'm frigging sick of MY money going to help others when it would be better off helping ME.

 

[Bear669]

I sympathize....

Fuck all of the bailouts!

Let the whole damn economy crash and there be a massive depression. It might take a few years but it will recover, it always does. Maybe then business will wise up for another 80 years.

I'm frigging sick of MY money going to help others when it would be better off helping ME.

But:

The smartest, wisest and wealthiest man I know recently stated:

" If I am right, there will be hyperinflation. If I am wrong, there is nothing worth investing in except guns, ammo and food".

(bailouts etc= inflation)