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This article sets up a straw man argument. The finance industry does provide value, but he we elides over the issue that most people have with the industry, wh

by oa335 6y ago

This article sets up a straw man argument. The finance industry does provide value, but he we elides over the issue that most people have with the industry, which is that losses and risk of the systems are incurred (e.g. bailouts) by the broader public while the gains are realized by the select few who have been granted a government monopoly on creating money (fractional reserve banking). If banking does something good for the public, and if it should be government-backed, then shouldn’t bankers operate (and be compensated) like public servants? The entire piece just reads like motivated reasoning TBH.

scooble 6y ago
There seemed to be a sudden shift in the middle where we went from ‘it’s good for banks to lend people money to start taco stands’ to ‘it’s good for banks to take bets on how many people will default on their mortgage’. To my untrained eye these look like very different activities .
- deleted 6y ago
  [deleted]
- kqr 6y ago
  Think of it this way: any economic activity that depends on future outcomes is effectively equivalent to a bet. Lending money is betting the debtor will not default. Making the bet about many people instead of one is, ostensibly, a way to lower the risk and thereby make the odds more palatable to a wider range of investors. Translation: more effectively move money from where it sits to where it will do good.
lhh 6y ago
These complaints don’t seem to align with reality from what I can tell. The TARP “bailout” was one of the biggest, which taxpayers profited on. The nationalization of Fannie and Freddie was hugely expensive, but I don’t see how that can be called a bailout, since equity holders were wiped out. As the article states, the vast majority of the benefits of such programs come from driving confidence in the functioning of the system so markets don’t freeze up. Moral hazard is a real thing, but it seems like the government walked the line pretty well during the crisis. What bailouts enriched private citizens at the expense of the public?
- oa335 6y ago
  TARP made only about $15 billion on about $400 billion “investment “ from around 2008-2013. An investment in almost any other financial asset would have made much much more money over that timeframe. To drive home the point, compare Warren Buffets bailout of Goldman to the TARPs bailout of banks (called the Capital Preservation Plan). Both involved purchases of convertible securities and warrants (both dilutive) from banks, but Buffet exacted much more onerous terms (lending Goldman, the most credit worthy bank, several billion at a 10% interest rate). He made about 3 billion on his 5 billion dollar investment. Meanwhile the US government lent much less creditworthy banks MORE money at LOWER rates, which is why the returns of the bailout are so abysmal. As for who benefited disproportionately , I would argue all of the primary stakeholders of the big banks and financial institutions. The primary stakeholders are not the shareholders as commonly believed, but instead the bonus eligible employees of those firms. 2010-2013 were amazing years for bonuses at trading desks at all the big banks. Anyone of the stakeholders who bet on the stability of the financial system should have been punished (financially) for making the wrong bet. Instead most ended up doing quite well.
  - jdsully 6y ago
    There's a bit of a chicken and egg problem here. Those excellent returns were extremely unlikely to happen had there been no TARP. Much like leveraged buyouts often end up in bankruptcy due to extensive debt, excessively onerous terms on TARP would have blunted its effectiveness at restarting the economy.

by oa335 6y ago

scooble 6y ago

There seemed to be a sudden shift in the middle where we went from ‘it’s good for banks to lend people money to start taco stands’ to ‘it’s good for banks to take bets on how many people will default on their mortgage’. To my untrained eye these look like very different activities .

deleted 6y ago
[deleted]
kqr 6y ago
Think of it this way: any economic activity that depends on future outcomes is effectively equivalent to a bet. Lending money is betting the debtor will not default. Making the bet about many people instead of one is, ostensibly, a way to lower the risk and thereby make the odds more palatable to a wider range of investors. Translation: more effectively move money from where it sits to where it will do good.

lhh 6y ago

These complaints don’t seem to align with reality from what I can tell. The TARP “bailout” was one of the biggest, which taxpayers profited on. The nationalization of Fannie and Freddie was hugely expensive, but I don’t see how that can be called a bailout, since equity holders were wiped out. As the article states, the vast majority of the benefits of such programs come from driving confidence in the functioning of the system so markets don’t freeze up. Moral hazard is a real thing, but it seems like the government walked the line pretty well during the crisis. What bailouts enriched private citizens at the expense of the public?

oa335 6y ago
TARP made only about $15 billion on about $400 billion “investment “ from around 2008-2013. An investment in almost any other financial asset would have made much much more money over that timeframe. To drive home the point, compare Warren Buffets bailout of Goldman to the TARPs bailout of banks (called the Capital Preservation Plan). Both involved purchases of convertible securities and warrants (both dilutive) from banks, but Buffet exacted much more onerous terms (lending Goldman, the most credit worthy bank, several billion at a 10% interest rate). He made about 3 billion on his 5 billion dollar investment. Meanwhile the US government lent much less creditworthy banks MORE money at LOWER rates, which is why the returns of the bailout are so abysmal. As for who benefited disproportionately , I would argue all of the primary stakeholders of the big banks and financial institutions. The primary stakeholders are not the shareholders as commonly believed, but instead the bonus eligible employees of those firms. 2010-2013 were amazing years for bonuses at trading desks at all the big banks. Anyone of the stakeholders who bet on the stability of the financial system should have been punished (financially) for making the wrong bet. Instead most ended up doing quite well.
- jdsully 6y ago
  There's a bit of a chicken and egg problem here. Those excellent returns were extremely unlikely to happen had there been no TARP. Much like leveraged buyouts often end up in bankruptcy due to extensive debt, excessively onerous terms on TARP would have blunted its effectiveness at restarting the economy.