February 8, 2009
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The Bail-Out
Should we bail out banks that have over-extended themselves or made stupid financial decisions?
First off, what do we mean by "Bank Bailout? The word Bank covers a number of very different kinds of financial institutions. Most of the banks covered in the "Bailout" which is currently making so much news are Investment Banks or very large Commercial/investment hybrids who have lost capitalization through poor mortgage derivative investments or guarantees.
The Great Depression (1929-40) led to pretty strict US banking laws which strictly prohibited Commercial Banks from engaging in investing or backing investments but starting in the 1980's investment and commercial banks were allowed to more-or-less combine and large hybrids were encouraged to absorb smaller institutions until we have the Bank Americas and Citi-Banks of today which have been deemed "To big to be allowed to fail" as has the strange AIG insurance, bank, investment conglomerate. In addition we have a couple of quasi-government institutions: Fanny May (The Federal National Mortgage Corp.) and Freddie Mac (The Federal Home Loan Mortgage Corp.) These two stock-holder owned but federally guaranteed corporations are supposed to purchase mortgages from banks so as to free the bank's funds to make more mortgages. Of course Fanny and Freddie can't be allowed to go under either.
We are left with a dilemma: If the giant institutions that underwrite our financial activity - or at least the major part of it, are allowed to fail, how do we manage to rebuild the economy without entirely disrupting our citizens' lives and causing much hardship to people whose only fault is that they tended to believe the "experts" and give them too free a use of their money?
We more-or-less have to bail out these "malefactors of great wealth" whose main goal seems to have been to lend as much as possible no matter what the risk and then try to pass the risk on before the inevitable collapse. The institutions asking for the bailout are those who got stuck with the bad paper.
Any "Bail-out" must come with strict and enforced regulation and supervision. Most of the profits lost were only on paper but that paper will eventually have to be redeemed sometime in the future.
As for those who got us in this mess or who jumped to take advantage of our stupidity - Off with their heads!
Comments (6)
I've linked you
Wow! You said it just right. I understand all that you explained but I could never have gotten down on "paper" as you just did. I think that those banks that are eventually "bailed" out should have certain guidelines to follow; for instance, the upper levels of executives who approved the loans should be fired, WITHOUT any "golden parachute." And there should be strict regulatory committees instituted before any of them get a dime. While I claim no prowess as a seer, I did wonder, back in the 80s when all these companies began to merge, what happened to the laws that we'd had to prevent such mergers. Remembering history, and all that. While I was born during the depression, I wasn't really aware of it until I was eight or ten and then the country was in WWII and recovering. But I lived with people to whom the fear of another depression was a reality that colored every day of their lives and mine. Also, some years ago I realized that there was no way the credit card companies could repossess all the goods that were being bought on credit if the people quit paying their credit card bills. Why didn't other people realize this?
While I agree that we should "off with their heads" the people who are most responsible for this mess, what is it going to take for the general public to see that using credit the way we have been is a recipe for disaster? Some sense of responsibility and restraint is going to have to be met somehow, someday.
Sorry to rant, but it all just makes me so angry and I feel so powerless. Guess I'm not alone, huh!
Peace, Annie
In addition to the bail out, we need to break up huge companies. We broke up steel and phone companies, but now we have gigantic banks who are too big to fail. I also believe that we should bail them out, because we were too lax in letting them merge, so it wouldn't be fair for us to not pay our sins.
Monopoly makes exploitation of workers too easy. It's too easy to hide information because when a worker finds something amiss, he has less incentive to blow the whistle. If you have 100 other companies you can work for, you can blow the whistle and come off as a hero, then get a job at another company. If there are only 2 other companies, why would you take your chances? The other two companies might very well not want to hire you because they see you as a deviant. Then you're screwed for life.
To "break up" a company, the government would have to prove that it violated some law (anti-trust, RICO, restraint of trade, etc.) and just being "too big to be allowed to allowed to fail" isn't enough. All these big banks supposedly went through an inspection concerning how their mergers and acquisitions would affect the economy and supposedly passed muster. Your point about the effect on whistle-blowers is well taken.
@tychecat -
Thanks for the info. Didn't the govt buy bank stocks? If it buys more than 50%, govt can break it up and resell, no? That's what the private equity firms were doing all along... I guess I don't know enough about the rules and what was already done.
wonderful issues altogether, you just won a brand new reader. What might you suggest in regards to your put up that you just made a few days in the past? Any certain?