Did the Bailout Work?

by: Matt Stoller

Mon Dec 22, 2008 at 10:49

Yglesias thinks so.

Credit conditions really did improve post-bailout, rather than get worse as it looked like they might have. The right thing to do is keep the crosshairs where they belong - on George W. Bush and Hank Paulson who decided to implement their recapitalization scheme in an irresponsible manner. Normally, when you "inject capital" into an enterprise you get a share of the action - board seats, voting shares, etc. - not just a dividend. That way, the public's representatives would have had a way to ensure that the public interest was safeguarded as banks played with the public's money. But Bush and Paulson care more about ideological correctness (free market!) and helping their buddies (Goldman!) than they do about safeguarding the public interest. Since there was no way to bring an alternative, less horrible administration to power back in October, I see no real alternative to doing something and then letting Bush and Paulson implement it poorly.

This is a widely held view, and I'm not sure it's wrong. Credit is alive; when you use a credit card it works, and if the bailout hadn't passed we could have been in a situation where ATMs and credit cards would have stopped working. It was that dangerous. Still, it's worth comparing the bailout position to what would have happened had Congress refused to pass a bailout. Let's just say for the sake of argument that Bush and Congress couldn't agree on a package, and that nothing - the worst case scenario - came to fruition. Poof, ATMs and credit cards stop working.

What happens then? As Dean Baker noted at the time, the Federal Reserve would simply have nationalized the banks and provided credit. Credit cards and ATMs turn back on in a few hours or a day or so, there's some damage, but now the Fed has control of the banking system. And then Congress could actually deliberate about what to do, and present President-elect Obama with the authority to actually fix the problem. That would have been the right way to deal with the crisis, instead of giving Paulson $700 billion which he is clearly distributing to his buddies.

It's hard to describe the amount of damage this kind of overt abuse does to a nation. There's a tremendous loss of confidence in our system of government, and as government is the only entity that can get us through the next several years, that's a huge problem. So yes, I suppose the bailout worked to keep the credit markets functioning, just as the invasion of Iraq certainly removed Saddam Hussein. He really isn't a threat to the world anymore, though the world is a much more dangerous place because of the invasion.

Matt Stoller :: Did the Bailout Work?

Tags: economic crisis, bailout, economy, OpenLeft, (All Tags)

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Did the Bailout Work? | 5 comments

this is like (0.00 / 0)

asserting that you've fixed the broken window because you duck taped the cracks.

what the bailout did was keep the banks from all declaring bankruptcy at once. Treasury could have IPOed 5 new banks with crystal clean balance sheets and we could have had similar results - except that tax payers wouldn't have been fleeced, and the criminal at the banks would be unemployed and their assets liquidated.

its a grave mistake to give any credit to Treasury for doing the right thing. this has been a fiasco.

~* the * Will * to go on *~

by: ObscureName @ Mon Dec 22, 2008 at 10:09:22 AM CST

Which bail-out? (4.00 / 1)

You're only talking about the original $700 billion bail-out, of which only about $350 billion has been spent.

Meanwhile, the Federal Reserve has also conducted a much larger bail-out of its own, with six times more money, and in this case nobody even knows who got a really humongous sum of money: $2 trillion dollars.

The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
The Fed responded Dec. 8, saying it's allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
"If they told us what they held, we would know the potential losses that the government may take and that's what they don't want us to know," said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.
The Fed stepped into a rescue role that was the original purpose of the Treasury's $700 billion Troubled Asset Relief Program. The central bank loans don't have the oversight safeguards that Congress imposed upon the TARP.

by: Jacob Freeze @ Mon Dec 22, 2008 at 10:17:41 AM CST

we're not fixing the right problem. (4.00 / 1)

There are banks in bad positions that did bad things. We've rewarded them.

Marenzi: I would say that's probably what's happening, that a few very large institutions are in financial difficulty, they're having a hard time obtaining credit. And if you look at the panel of banks on the LIBOR rate, more than half of them I would put in that category. Now, there are a lot of banks out there who didn't make bad bets, who didn't get very involved in the subprime markets, and they're doing quite OK -- and they have no shortage of credit for those kinds of institutions.

http://marketplace.publicradio...

Why haven't we rewarded good banks, and stepped around the bad players?

by: fuzed @ Mon Dec 22, 2008 at 10:26:49 AM CST

I don't understand the point being made here (4.00 / 1)

The federal reserve was in no way ever going to undertake nationalizing (i don't know if you can call the takeover of a business by an unelected quasi-private company "nationalization") any major financial institutions without congressional approval. Not wanting to destroy the fabric of democracy by doing what you want as an independent bank is a laudable thing. Even if it requires running things by Bush and a republican congress.

by: DeroCool @ Mon Dec 22, 2008 at 11:24:41 AM CST

What to give the mad man (0.00 / 0)

Do we give the mad man a pistol, rifle or grenade?

Whatever choice we went with, it was still Bush and his crew who implemented the solution. As Jacob above points out, it isn't as if using the Fed guarantees a better solution.

I eventually supported passing the bailout because I was convinced we'd get most of the money back and the emergency was big enough. I don't know if that was correct or not (still) but it wasn't like any good choice was available.

by: Mark Matson @ Mon Dec 22, 2008 at 11:25:14 AM CST