Posted on 05/18/2014 6:43:28 AM PDT by SeekAndFind
It's easy: Let the banks fail and give the money to American taxpayers instead
Are you still angry that Washington forced Main Street to bail out Wall Street during the Great Recession? Timothy Geithner can live with that.
In his new book, Stress Test: Reflections on Financial Crises, the former Obama Treasury secretary insists government needed to stop the panic by whatever means necessary. During a five-alarm inferno, the thinking goes, it's smarter to focus on extinguishing the blaze than punishing the arsonists. And to Geithner, dissenters are misguided purveyors of "Old Testament vengeance" and "moral hazard fundamentalists."
Geithner is only half right.
He's correct to assume that letting the megabanks collapse — and doing nothing else — might have invited a deflationary depression as bad as the one in the 1930s. Both innocent and guilty would have suffered. And America, like any modern democracy, doesn't really do mass suffering. So the politicians always blink. (Letting Lehman fail was the rule-reinforcing exception.)
But Geithner is wrong when he said, as he did to The New York Times, that Americans are "deeply confused and mistaken" if they think there was "a way to somehow protect people without doing things that looked like you were protecting the banks." Actually, there was an option that would have accomplished just that. There was a way to support Main Street, punish Wall Street, and avoid the terrible incentives for future recklessness that bailouts inevitably create.
Remember, what Washington did in 2008 was authorize the $700 billion Troubled Asset Relief Program. It eventually pumped some $400 billion of taxpayer dough into American financial institutions — whether they wanted the cash or not. The politicians could have let insolvent banks simply go bust. True, such a move would have hammered an already weak economy. To avoid a terrible collapse in spending and investment, however, Washington could have deeply cut taxes or sent tax rebates to households and businesses. How to pay for all those checks? Borrow the money from the Federal Reserve, which, after all, owns the printing presses. Fiscal stimulus meets monetary stimulus.
Some of the money would have been spent, some used to pay off debt, some saved. But the net result likely would have been a far shallower economic downturn, especially if combined with a clear and explicit Fed promise to support spending no matter what. Former Fed Chairman Ben Bernanke recommended just such a "helicopter drop" of money to boost the stagnant Japanese economy back in 2003. Too bad he didn't make the same case to Team Bush and Team Obama five years later.
And what about the banks? For starters, a more modest recession and faster recovery would have limited bank failures. And the assets of the ones that did sink could have been purchased by stronger remaining institutions. Indeed, Geithner writes that legendary investor Warren Buffett told him that without TARP, "everything would have crashed, and I would have been the first to buy." Regulators also could have loosened rules to make it easier for startup banks to replace the failed old ones.
The U.S. has experienced a financial crisis, on average, every decade or so for nearly 200 years. Odds are the most recent one won't be the last one. Forcing banks to maintain a much larger capital cushion would go a long way toward avoiding future disasters. But if Big Finance should stumble again, Washington should let it fall. Wall Street banks won't need a bailout, but their Main Street customers will.
Thanks James, we’ve been saying that here on Free Republic for ten years or so now...
I have to quibble with you. Any hard limit, or some squishy equivalent, is more regulation, and it’s regulation of an industry that spends many hours and many dollars to get around them anyway.
Plus, size by itself is not the problem, the problem is that they know they’ll always get bailed out because they always have been bailed out in the past. Let them collapse under their own weight and the ones remaining will learn a thing or two about proper risk.
One solution is to require proportionately higher reserve requirements the larger the bank becomes. This will tend to make their size self-limiting.
We must not allow any fractional reserve bank to get so large that its collapse threatens the rest of the financial system, or could trigger a cascade of other failures.
Too big to fail, too big to exist.
Lurk, the banks were forced by the courts and politicians to make bad loans to people who had no means to pay them back.
Let me ask you. If the courts ordered you to make $100 loans to people, and you’d never get it back, would it hurt you financially?
Okay, and if you then went belly up and had to declare bankruptcy, would it then be okay if everyone referred to you as a corrupt individual?
Barney Frank and other politicians from both sides of the isle participated in this, and sat back and watched the whole thing cave in on itself. They didn’t life a finger.
Not only that, guess what they forced the banks to do after this all went down. Why they forced them to distribute tarp funds and sell the ball in motion again, for massive failed loans to people who still can’t pay them back.
This is all going to take place again.
And then folks who mean well will drop by to reference the people in the banking industry and on Wall Street as crooks.
The Crooks are located on Capital Hill and at the White House. They are also located at court houses all over this country. They sit in black robes there.
I am not convinced the banking industry or Wall Street were the major problems folks reference them as being.
It’s just too easy to pass up for some people, evil bankers and those unknown kings on Wall Street.
The Leftists have worked their magic.
‘Some of the money would have been spent, some used to pay off debt, some saved.”
Priming the pump by putting money in consumer hands no longer works like it did before our national obsession with free trade. When we had a consumer manufacturing base (pre 1990), tax cuts or rebates to the public were spent by consumers on products made in American factories by American workers. Demand increased, the factories hired unemployed workers, and the newly hired workers bought more goods as well as paid taxes. Today when government puts extra money in the hands of consumers, to the extent they spend the money it goes to increase employment in the foreign factories that make the consumer products.
Policy has consequences.
I remember all of the too big to fail talk. Well... That is how it works. If firms are too big to fail, they have become too big! If they fail, more competent people buy their assets at a good price and the economy is stimulated.
Lots of wise voices at the time were saying that all of the bailouts and stimulus would just cause the downturn to be significantly longer and more painful. How come after all these years of living thru it, nobody talks about that any more? That would be the most perfect talking points. Is the GOPe concerned that their complicity in it would reflect poorly on them?
A great solution S&F, that’s why it was not, and will never be done. The moneys (FED, big govt, banks, insurance companies) are all in bed together, the citizens (peasants) are not a part of that.
The CATO Institute claims that without government propping them up, at a particular point corporations will self destruct. While possibly true in pure economics, the impulse of government is to prop them up: both from lobbying by the bloated corporation, but also from not wanting to “rock the boat”. Not wanting to risk catastrophe.
What disproves this are the large number of oligopolies that are jamming out economy right now. Not just banking and finance, but the media, big pharma, interstate trucking, agribusiness, energy production, etc. And not just US corporations, but multinationals who want to sell in our market, but neither produce here nor to pay our taxes.
Busting these up would do our economy wonders.
worth repeating:
“Priming the pump by putting money in consumer hands no longer works like it did before our national obsession with free trade. When we had a consumer manufacturing base (pre 1990), tax cuts or rebates to the public were spent by consumers on products made in American factories by American workers. Demand increased, the factories hired unemployed workers, and the newly hired workers bought more goods as well as paid taxes.
Today when government puts extra money in the hands of consumers, to the extent they spend the money it goes to increase employment in the foreign factories that make the consumer products.”
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