Bailouts: Revisionist History

By James Kwak

Probably most of you have already read David Cho’s Washington Post article on how the Big Four banks (a) have gotten bigger through the crisis, (b) have increased market share (”now issue one of every two mortgages and about two of every three credit cards”), (c) are using their market clout to increase fees (while small banks are lowering fees), and (d) enjoy lower funding costs because of the nearly-explicit government guarantee.

I just want to comment on this statement by Tim Geithner: “The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy.” (Emphasis added.)

Um, no.

There were all those nuts saying that Treasury should have taken over the banks. This would have allowed the imposition of haircuts on creditors and limited moral hazard. There was also the less controversial option of making real, lasting constraints on banking practices a condition of the bailouts; the conditions that were imposed were peripheral and timed to evaporate when the TARP money was paid back. As a result, now Geithner has to bargain with Congress and an increasingly confident industry to get his regulatory reform.

It’s also important to differentiate between September 16-October 14, when you could give the government the benefit of the doubt because of the intense panic and uncertainty caused by the collapse of Lehman (LEHMQ), and November-February (when the follow-on bailouts of Citigroup (C) and Bank of America (BAC) took place), when the government was able to choose among a range of options.

Saving the economy was a good thing. Doing it a particular way was a choice.

That said, I’m glad that Geithner says that undoing this situation is “the dominant public policy imperative motivating reform.”

Comments

[Leftfield:]

Give them the money first, every day counts! (TARP), trust them, ask questions later. What planet are our leaders from?
Roosevelt got plenty of reform in exchange. This time, it looks like the oligarchs finally get to completely take over, with our money. Kinda makes me feel sick.

Sep 02 02:28 PM

[CautiousInv...:]

While I prefer some of the more extreme measures, maybe Treasury could have engaged in some long-term planning(several forward looking weeks) by making CAP (TARP) monies available simultaneously with a hastened version of the soap opera viewed on CNBC as the stress test. Instead,we gave them the money only wind up negotiating with the oligarchs after we had given away the store. As to the underlying financial soundness of the program it is not profoundly shocking the most credit worthy institutions with the best business models were the first to repay CAP monies. Before we break out the bottles, lets see what happens with GM, Chrysler, AIG, the agencies and other black holes.

Sep 02 02:28 PM

[Econ 101:]

Give me a break! Tim (I cant figure out Turbo Tax) Gietner is NOT trying to correct the oligopoly of the big banks, he is helping enforce it. This whole administration is using Animal Farm as a play book to script their responses to questions about their actions.

These banks need to be broken up, they should have been allowed to go bankrupt. I understand it would have caused a huge financial mess for those involved with the wall street crowd. But it would have allowed those banks or Credit Unions who didnt lend irresponsibly to pick up the pieces.

What we have is a RICO stiuation between the congress and the big businesses that will never be investigated, let alone prosecuted. The congress passes laws to help those who stuff their campaign coffers and forget the rest of the country.

Look at goooh.com and get rid of these thieves! Both parties are moraly corrupt and complicent in selling America to the highest bidder.

Sep 03 11:52 AM

[Econ 101:]

Here is a UTUBE video that captures the situation well:
www.youtube.com/watch?...

Sep 03 11:58 AM

[Bailmeout2:]

Couldn't have said it better myself!


On Sep 03 11:52 AM Econ 101 wrote:

> Give me a break! Tim (I cant figure out Turbo Tax) Gietner is NOT
> trying to correct the oligopoly of the big banks, he is helping enforce
> it. This whole administration is using Animal Farm as a play book
> to script their responses to questions about their actions.
>
> These banks need to be broken up, they should have been allowed to
> go bankrupt. I understand it would have caused a huge financial
> mess for those involved with the wall street crowd. But it would
> have allowed those banks or Credit Unions who didnt lend irresponsibly
> to pick up the pieces.
>
> What we have is a RICO stiuation between the congress and the big
> businesses that will never be investigated, let alone prosecuted.
> The congress passes laws to help those who stuff their campaign coffers
> and forget the rest of the country.
>
> Look at goooh.com and get rid of these thieves! Both parties
> are moraly corrupt and complicent in selling America to the highest
> bidder.

Sep 03 12:36 PM