Quote:
Originally Posted by Resolute 14
Too broad a question. I posted in one of the other occupy threads that in the case of the Chrysler and GM bailouts, both companies repaid the US and Canadian governments six years early, at a profit to taxpayers, and resulted in guaranteed production (and therefore jobs) in Canada. In that respect, a good call.
I have limited knowledge of how the bank bailouts turned out, though I suspect your impressions are close to accurate.
Ultimately, a bailout is a huge risk to the government, and therefore the taxpayer. As with a regular bank and a regular citizen, if the lendee defaults, the lender gets screwed. It is probably not a risk I want our government taking very often.
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The difference between bailing out the financial system and bailing out GM is this:
Think of the financial system as the blood flowing through the veins of your body.
Think of General Motors as an arm or a leg.
You can live if you lose an arm or a leg.
On the other hand, you'll flat out die if the blood stops flowing through your body.
In September, 2008, the world was dying while the circumstances leading into the situation aren't too relevant in the moment of crisis. You have to deal with what's in front of you, holding your nose if you must.
Blood had ceased flowing through the body of the global financial system. Banks didn't trust each other to be alive the next day and were demanding extraordinary interest rates to carry the risk or were just refusing normal inter-bank business transactions outright.
This freeze was showing up dramatically in indicators no one had heard about or cared about previously, the LIBOR Rate and TED Spread as examples, which jumped to extraordinary levels. Global trade was effectively ceasing up as a result. Cargoes sat in ports and were rendered immovable.
In December, 2008, Americans were buying cars at a replacement rate of once every 25 years while USA treasuries were trading at negative yields, people effectively paying the government to hold their money because they didn't trust the financial system to be alive the next day..
The blood had ceased to flow, not just for crappy and extended banks, but ALL banks and financial institutions. The President of the Royal Bank has publicly said there was a moment in early October, 2008 when he wasn't sure they were going to make it. And that was the best bank.
You must remember that the banking system is built on leverage even in normal times. For hundreds of years, the working model for banking revolves around this: ten people come to a bank and each deposit a dollar, the bank keeps a dollar (Tier One Capital Ratios) or two on hand and then lends the rest out to others, the underlying premise being that no more than one or two people at any one time will show up and ask for their money back. This has worked for hundreds of years. An efficient bank will never have anywhere close to the ten dollars sitting on hand. At the moment it went under, Bear Stearns, an investment banker not operating under the same regulatory constraints as a normal bank, had one dollar for every 32 dollars it was responsible for. It collapsed under the weight.
Government money flowing into the global banking system was essentially a transfusion of blood . . . . . the moment of crisis began to pass, confidence in the system began to be restored, the blood began to flow again, global trade began to function again.
It had to be done, holding your nose probably.
I had said at the time, restoring the functionability of the global financial system was a critical and wise policy move and that saving General Motors was unnecessary.
You can live without an arm or a leg, but you can't live without blood flowing through your body.
Two different things. They didn't have to be treated the same way.
In the meantime, in the USA, banks have returned all government money along with a profit to taxpayers as of mid-2010. For some reason, a myth continues to exist that money going to financial institutions went into a dark hole and never emerged again.
It is legitimate, however, to say, that the leveraged circumstances of 2008 DID cost taxpayers in terms of economic turmoil which is still lingering today.
Governments have deliberately chosen to go deep into debt with job creation intitiatives to try to combat this . . . . . but that's really a policy debate about whether or not duly elected governments should have done that. I would argue it was unwise.
Most of the crisis came about - as it always does - when leverage is created in unregulated and unsupervised spaces. Smart guys get a bright idea, make some money and then everyone jumps in before it eventually goes kerplooey. They weren't watching each other and no adults were supervising them.
I saw one quote in 2007 where an investment banker on Wall St showed the first expression of worry, paraphrased: "No one really knows how much of this debt is out there. Is it $400 billion? Is it more than $1 trillion? I don't know and I'm at the heart of putting these things together. If I don't know, who does?"
Of 15,000 economists in the USA, only about 10 were on record as saying a problem was developing, as per a Paul Krugman column in the New York Times in 2008.
Whenever something like this happens - and there are ample examples in history - its always about unregulated, unsupervised leverage, money being created out of thin air.
Based on history, de-leveraging periods like this take about seven years to wind out, they are characterized by unemployment about 5% higher than normal and commonly you see multiple recessions as growth stalls out periodically.
All of this has happened before and all of this will happen again.
Always look for the leverage.
My two cents.
Cowperson
