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The global economy as of 2008 was and continues to be absurdly leveraged, often combined with a wonderful smorgasbord of complex financial instruments that obfu

The global economy as of 2008 was and continues to be absurdly leveraged, often combined with a wonderful smorgasbord of complex financial instruments that obfuscate risk. If the banks holding these complex instruments were allowed to fail, if Lehman Brothers collapsed along with AIG, then it's very likely that the financial system would have been dragged down with it. The resulting recession would be likely on the same magnitude as the great depression. The bank bailout inserted a huge amount of liquidity into the market, which absorbed much of the shock of reduced consumer spending. Combined with the auto bailout and Obama propping up state budgets, the economy was able to hold together. Truthfully, I believe that the banks should have never been able to be too big to fail. Let it be said, however, that main street and wall street are intimately linked, and failure of one deeply imperils the other.

humanrebar 10y ago
Regarding bailouts saving the economy... that's the narrative. I'm not sure how anyone can be confident that it is accurate. Either way, it's fatalistic to say that wall street and main street are linked. We could have easily picked main street banks over wall street banks. To some degree, that's what the opposite of too-big-to-fail looks like.
- ComradeTaco 10y ago
  I think it's over simplifying the situation to make a division between main street banks and wall street banks. Main street is largely owned by and receives liquidity from wall street. Many seemingly stable "main street" banks actually had tons of subprime junk that was rated as triple A up until the correction. These main street banks also had assets whose worth was threatened by the collapse of wall street. Some of these main street banks owned pieces of wall street itself. I mean I don't give a nickle about wall street, but I understand that the collapse of wall street would have been totally devastating to the global economy. Compartmentalization is key for the financial industry.
- muninn_ 10y ago
  Sorry, I'm not sure what you mean by "picked Main Street banks over Wall Street banks" ?
- bmelton 10y ago
  > We could have easily picked main street banks over wall street banks. If there aren't any community banks, it's pretty hard to choose them. Dodd-Frank, according to many -- including Barney Frank, the "Frank" in Dodd-Frank -- had a number of unintended consequences, the largest of which was the compliance cost, which smaller banks couldn't manage. The result of burdensome compliance, more often than not, was consolidation; couple that with the too-low threshold for what counts as 'too big' and the end result was that most community banks were too small to succeed - where we once had 18,000 main street banks in America as of 1985, we currently have fewer than 2,000.
  - wlll 10y ago
    It would be interesting to see the number of banks pre and post Dodd-Frank, say 2010 -> now to really gauge the impact. It would have taken a remarkably foresightful bank to close in 19xx on account of law passed in 2010.
    - astrostl 10y ago
      Graph with citations at http://www.unbiasedamerica.com/media/say-goodbye-to-small-banks http://www.unbiasedamerica.com/media/say-goodbye-to-small-ba...
      - TimJRobinson 10y ago
        I had a look at the sources for that post and couldn't find anything showing small banks growing up to 2008. https://fred.stlouisfed.org/series/US1NUM https://fred.stlouisfed.org/series/US1NUM (from exploring citation #4 in the post) was the closest I could find and that shows that over the long term small banks have been in decline since the 80's.
  - KirinDave 10y ago
    Is that really true though? The majority of Credit Unions in the US don't exceed the asset pool size or have offices in designated areas. It's only if they're doing a lot of home loans or student loans that they might still get entangled. The small credit unions are in aggregate a very big lobby in Washington and they were pretty good at getting small members exempted. DF and CARD were mostly about stopping egregious behavior by very large FIs.
crdoconnor 10y ago
"If the banks holding these complex instruments were allowed to fail, if Lehman Brothers collapsed along with AIG, then it's very likely that the financial system would have been dragged down with it. The resulting recession would be likely on the same magnitude as the great depression." Other countries simply nationalize and recapitalize the bank and sell it on. This worked out well for Sweden: https://en.wikipedia.org/wiki/Swedish_banking_rescue https://en.wikipedia.org/wiki/Swedish_banking_rescue Any recessionary impact can always be offset by counter-cyclical fiscal spending.
- bubbleRefuge 10y ago
  Correct. Notice how you never hear this in the main stream financial press.
- JoBrad 10y ago
  Didn't we essentially do that with several companies, including GM?
bubbleRefuge 10y ago
Banks are to big to fail has become mythology. Please read Bill Black of UMKC. He argues that on the eve of insolvency regulators can move in and take over the bank on Friday, blowing out management and share holders while saving depositors, and re-open the bank under a different name on Monday. See Wachovia going over to Wells Fargo.

humanrebar 10y ago

Regarding bailouts saving the economy... that's the narrative. I'm not sure how anyone can be confident that it is accurate. Either way, it's fatalistic to say that wall street and main street are linked. We could have easily picked main street banks over wall street banks. To some degree, that's what the opposite of too-big-to-fail looks like.

ComradeTaco 10y ago
I think it's over simplifying the situation to make a division between main street banks and wall street banks. Main street is largely owned by and receives liquidity from wall street. Many seemingly stable "main street" banks actually had tons of subprime junk that was rated as triple A up until the correction. These main street banks also had assets whose worth was threatened by the collapse of wall street. Some of these main street banks owned pieces of wall street itself. I mean I don't give a nickle about wall street, but I understand that the collapse of wall street would have been totally devastating to the global economy. Compartmentalization is key for the financial industry.
muninn_ 10y ago
Sorry, I'm not sure what you mean by "picked Main Street banks over Wall Street banks" ?
bmelton 10y ago
> We could have easily picked main street banks over wall street banks. If there aren't any community banks, it's pretty hard to choose them. Dodd-Frank, according to many -- including Barney Frank, the "Frank" in Dodd-Frank -- had a number of unintended consequences, the largest of which was the compliance cost, which smaller banks couldn't manage. The result of burdensome compliance, more often than not, was consolidation; couple that with the too-low threshold for what counts as 'too big' and the end result was that most community banks were too small to succeed - where we once had 18,000 main street banks in America as of 1985, we currently have fewer than 2,000.
- wlll 10y ago
  It would be interesting to see the number of banks pre and post Dodd-Frank, say 2010 -> now to really gauge the impact. It would have taken a remarkably foresightful bank to close in 19xx on account of law passed in 2010.
  - astrostl 10y ago
    Graph with citations at http://www.unbiasedamerica.com/media/say-goodbye-to-small-banks http://www.unbiasedamerica.com/media/say-goodbye-to-small-ba...
    - TimJRobinson 10y ago
      I had a look at the sources for that post and couldn't find anything showing small banks growing up to 2008. https://fred.stlouisfed.org/series/US1NUM https://fred.stlouisfed.org/series/US1NUM (from exploring citation #4 in the post) was the closest I could find and that shows that over the long term small banks have been in decline since the 80's.
- KirinDave 10y ago
  Is that really true though? The majority of Credit Unions in the US don't exceed the asset pool size or have offices in designated areas. It's only if they're doing a lot of home loans or student loans that they might still get entangled. The small credit unions are in aggregate a very big lobby in Washington and they were pretty good at getting small members exempted. DF and CARD were mostly about stopping egregious behavior by very large FIs.

crdoconnor 10y ago

"If the banks holding these complex instruments were allowed to fail, if Lehman Brothers collapsed along with AIG, then it's very likely that the financial system would have been dragged down with it. The resulting recession would be likely on the same magnitude as the great depression." Other countries simply nationalize and recapitalize the bank and sell it on. This worked out well for Sweden: https://en.wikipedia.org/wiki/Swedish_banking_rescue https://en.wikipedia.org/wiki/Swedish_banking_rescue Any recessionary impact can always be offset by counter-cyclical fiscal spending.

bubbleRefuge 10y ago
Correct. Notice how you never hear this in the main stream financial press.
JoBrad 10y ago
Didn't we essentially do that with several companies, including GM?

bubbleRefuge 10y ago

Banks are to big to fail has become mythology. Please read Bill Black of UMKC. He argues that on the eve of insolvency regulators can move in and take over the bank on Friday, blowing out management and share holders while saving depositors, and re-open the bank under a different name on Monday. See Wachovia going over to Wells Fargo.