Let them Fail or Bail?

[CroMagnon]

Should the US govt be bailing out the financial institutions? What is the actual cost (or some reasonable estimate) of what each choice will cost the average taxpayer?

I am asking because I don't have the knowledge or info to make such a decision. Does anyone? If we bail them out we are sending a signal to future risk takers that the Govt will always pick you up so don't worry. If we don't, GE won't sell enough light bulbs and will have to lay off 30,000 people and I won't be able to afford the GI Joe, with the Kung-Fu grip for my little boy at Christmas.

Thanks,
Cro

[nsidestrate]

This used to be an area where I found broad agreement with my conservative friends. For the most part, conservatives strongly opposed the Chrysler bail-out and called it socialism. I don't hear the same complaints today, although the problem is far worse in my view. At least with the Chrysler bailout, the decision was debated in Congress and a law was passed. Today, we are just doing it by assertion of executive authority.

[niin]

The problem with 'today', at least in some cases, is the market is far more agile than the government can be, so there wasn't really that much time to debate it. And, at least with AIG, the effect of its failure was predicted to be very far-reaching, since they touch so many things around the world.

Chrysler failing wouldn't have pushed an already weak economy further into the hole, but with the banks today, they're the core of our economy, so them failing would we very bad.

I'm very much against socialized capitalism (socializing the losses, privatizing the gains), but in some cases the cost of those institutions failing is much higher than the cost to bail them out.

Another issue is if too many banks fail, requiring the FDIC to cover a large number of deposits, it (the FDIC) too could fail. I think I read last night that they had $48B in reserves left, after paying out something like $4B to IndyMac... if a big consumer bank like WAMU fails, the FDIC will be on the hook for something like $24B, since the average account balance in WAMU accounts is well below the $100K FDIC limit.

What should happen is the unviable banks/institutions should fail, and the viable ones be bought up by someone else. BoA buying Merrill Lynch, for example.

One theory is to just let it all go to hell and rebuild again; I mean, we did eventually recover from the Great Depression, right?

[CroMagnon]

[niin]

[PauliF]

from what I can gather at the moment....
and this goes for intervention over here too (we nationalised a bank a year ago)....

it seems that that the differences in "iliquidity" and "solvency"...
so far insovlent organisations have been let go but others that may be solvent but currently have significant problesm with liquidity are be "saved"...

what we are witnessing is the reverse of the last couple of decades in reverse but speeded up... the entire financial sector now seems to be an unimaginable web of counter party debt and incoherent risk swapping..

most economic downturns (all the ones I have seen or heard about except maybe the great depression and that blip in the 70s ) are caused by price shocks in "real" economic sectors that then send ripples through the rest of the economy.... e.g oil, food etc

the problem with this one is that it has started in the financial sector and this has seeped into the "real" economy and seems to be causing a nasty kind of feedback type reaction.

the very worse thing that could happen now (IMHO) is if a either a small country or a very large corporation defaults on their loan stock. If that happens things will really start to unravel and the entire system may well implode. even more so than at the moment. If that happened then western governments would have very few choices. they could either let us slide to a Mad Max type outlook or nationalise most if not all companies in order to keep people working and things being produced.

seems like we are gonna have a rethink sometime soon anyway.
What amazes me is that there is not one single economic doctrine that refers to Darwin at all. most economic theories from micro to macro assume "rational" consumers and "rational" producers. I think we need to come to terms with the fact that we used to be monkeys and there is still plenty monkey in us. if we do not do this then the way we arrange our society which is essentially a machine designed to facilitate collaboration will implode and we will head back the caves if we are lucky.

where the f*** is Jesus when you need him?

[krazytxan]

What irks me the most is the bonuses of the CEO's.

Lehman:

[nsidestrate]

If you are keeping score, the following companies all received bailouts of one sort of another:

Bear Sterns
Fannie Mae
Freddie Mac
AIG

The following similarly situated companies were denied similar bailouts or guarentees:

Lehman Brothers
Merrill Lynch
Indy Mac
Silver State

Particularly in the case of Lehman compared to Bear Sterns it is hard to differentiate other than the fact that one of them was first. No one really knows what the consequences would be of allowing these firms to fail. There is a lot of gloom and doom speculation, but no one really knows. It seems pretty clear in hindsight that if Chrysler was allowed to fail it would not have been Armageddon. It is unclear to me that AIG would have been the complete disaster many are suggesting. It is possible that there existed a price at which someone would have stepped in -- we just didn't hit it yet.

Furthermore, there is a potential huge implied cost to us all as taxpayers in that future companies make take even greater risks with CDOs or other speculative financial instruments because at the end of the day there is a lot of upside benefit and the downside risk is tempered by the possibility of a Government rescue. In the absence of strong regulation, this seems to me a very dangerous policy.

There are many other costs. For instance, the three month T bill yield has dropped to very nearly zero. In other words, the Fed is now getting competition from stuffing cash in your mattress. We have magically invented $85 billion to insert in the money supply. Does that sound inflationary? Think that will hurt the dollar? Are there more financials on the potential bail-out list? What is the criteria? Who decides? Have these bailouts really saved investors money? Charts of the financial stocks don't make that obvious.

The Fed can't have it both ways. Either the investment in AIG is a good one that is likely to be profitable -- then someone else should have done it OR the investment is highly speculative -- then taxpayers shouldn't do it.

Do we know that political influence doesn't make a difference? Fannie and Freddie are well known to give huge to campaigns.

[Stew21]

nside, I thought Bear Sterns was bought up by Bank of America, although it WAS forced.(supposedly)

Heard this the other night on CNBC.

[fatshaft]

[Bullajami]

There is no authority in the US Constitution for the federal government to take public money and purchase private institutions - the reason does not matter.

McDonalds food makes people fat. I propose the federal government purchase McDonalds Corportion and realign them so they only sell healthy food. We have an obesity crisis, ffs!

[PauliF]

McDonalds sells food

Banks sell money
Insurance companies sell risk
Investment Banks/Hedge Funds etc sell bets on the price of money and risk

now I know you are wondering... "how do they know how much money is worth to sell and buy it and how on earth do you value risk"... I wonder that too... the current problem is primarily down to a bunch of inbred wall street and city boys being so mad in the head that hey believed the knew how to do it... turns out no one has a fricken clue

[darvon]

Wait til the Detroit bailout comes......


There is concern that we might have bailout fatigue before that happens.

[nsidestrate]

[Stew21]