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2008 was essentially a liquidity crisis not a solvency crisis. Think of it as a bank run on things that looked like banks but didn’t have deposit insurance (hen
by ls612 4y ago
2008 was essentially a liquidity crisis not a solvency crisis. Think of it as a bank run on things that looked like banks but didn’t have deposit insurance (hence all the talk afterwards about ‘shadow banks’)
Once you understand what was happening the solution of first solving the liquidity crisis (by having the government front the liquidity; note that all of the banks paid back the TARP money), and then instituting strict capitalization regulations on banks (ie Dodd-Frank and Basel II which hurt their profits by reducing risk) to avoid the same thing happening again and remove some of the moral hazard is a perfectly reasonable policy response.
- HWR_14 4y agoBut the issue with bank runs is that little old ladies lost their life savings. Who cares if hedge funds lost their money because of a run in the bank. Besides, it seemed from the outside to very much be a solvency/asset price issue. Mortgages were being defaulted on, money was owed. If GS or AIG went out of business and ended up being a subsidiary of Burry's fund, who does that hurt. GS's customers have their money/shares GS manages sequestered so it's not like Main Street would lose their portfolios (although they would have to write down the value)
- ls612 4y agoI’m saying that the fact that the banks all paid back their TARP money in full with interest and those banks still exist today is a signal that it was not fundamentally a solvency crisis.