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A large number of mainstream economists believe that without TARP the entire global banking system would have collapsed, credit would have dried up and a depre

by hluska 3y ago

A large number of mainstream economists believe that without TARP the entire global banking system would have collapsed, credit would have dried up and a depression would have been long lasting. This is one of those situations where there was no good way out. The least awful option ended up being the best out. The real issue was that Timothy Geithner, Ben Bernanke and Henry Paulson could not effectively communicate the economic issues during an election. As much as I respect John McCain, his decision to end his campaign to ‘return to Washington’ was an unmitigated disaster. Both for the economy as a whole and for that manifestation of the Republican Party. We can draw a direct line from that stunt through the Tea Party and into today’s current populist climate. Long rambling explanation short, I don’t believe there were other options. Decisions were made in real time and in many cases, they had to be made overnight. Two major deals that would have dramatically altered the response to the subprime crisis both fell apart over night on a weekend. Ben Bernanke was (and remains) one of the world experts on the Great Depression. His education lead him to take policy steps that would prevent another Great Depression. Maybe we’re worse off, maybe we’re not. But I’m glad I didn’t live my entire thirties under a depression.

noja 3y ago
What about the "and afterwards" part, where the banks that were too big to fail were split up, and regulation was improved?
- JumpCrisscross 3y ago
  > What about the "and afterwards" part, where the banks that were too big to fail were split up, and regulation was improved? Whether TBTF banks should be split up is still being debated. With size comes resilience (and fewer books to look over). In terms of improved regulation, the fact that we're less than a year out from the second, third and fourth largest bank failures in our nation's history with seemingly no memory of it seems to speak for itself [1]. [1] https://en.wikipedia.org/wiki/List_of_largest_bank_failures_in_the_United_States https://en.wikipedia.org/wiki/List_of_largest_bank_failures_...
- hluska 3y ago
  I don’t understand your point, but yes, aspects of the US financial industry were improved as a result of the 2008 crisis. That happened because of roughly two years of work by congressional and senate oversight committees. Other things (ie - derivatives) were not properly regulated. If you’re interested in what one form of regulation could have looked like, you should look up Brooksley Born. Most specifically, what happened to her when she proposed regulation. Ben Bernanke spent so much time testifying and was so bothered by his experience that he used to be a registered Republican. Now he’s independent.
  - deleted 3y ago
    [deleted]
  - no_wizard 3y ago
    For anyone interested, here's a good summation of the Brooksley Born story[0]. Its a tragedy through and through. She faced harassment from all sides and her expertise was brushed off carelessly. Its really truly sad. The same thing happened to Raghuram Rajan from the IMF. He delivered a paper criticizing the financial sector entitled "Has Financial Development Made the World Riskier" which argued that disaster loomed. The paper, which proved accurate, was aggressively criticized by Larry Summers, who served as the director of the National Economic Council in the Obama Administration. He was also ostracized for expressing a legitimately dissenting opinion on how financial markets in their then current form were a great risk the global financial system [0]: https://www.sfgate.com/business/bottomline/article/Brooksley-Born-foresaw-disaster-but-was-silenced-2454453.php https://www.sfgate.com/business/bottomline/article/Brooksley...
    - hluska 3y ago
      That link is an excellent summary! It’s quite interesting because we can look back in time and find some excellent people who sounded the alarm bells. They all got trounced. I think if we can take any solace, it’s that Larry Summers did not serve as Obama’s Secretary of the Treasury. It went to Tim Geithner instead.
Aloha 3y ago
The Tea Party and malignant Trumpism would have developed under a president McCain as anything else.
- eadmund 3y ago
  I don’t think that’s true. The development of the Tea Party comprised several causes: the anti-constitutional attitudes of the Obama administration; Mr. Obama’s personal anti-American character; the general incompetence of the Obama administration; and, sadly, racism (I did not appreciate at the time how many of the folks who were vocal about the former factors were motivated by this last, utterly disgraceful, factor). These factors would have been lessened to one degree or another — or altogether missing — in a hypothetical McCain administration. Granted, hypotheticals are always tricky, and one can’t predict what sort of malignant reaction a McCain administration would have provoked.
  - no_wizard 3y ago
    >the anti-constitutional attitudes of the Obama administration; Mr. Obama’s personal anti-American character; the general incompetence of the Obama administration These are some pretty big things to posit without some citations. Simply put I don't remember anything of this nature, at all, with the exception of the prevalence of racism. I'm not saying Obama and his administration didn't have faults (they sure did) but like I said, other than the prevalence of racism, nothing else rings true.
    - blindriver 3y ago
      You don't remember Obama's campaign of "Change we can believe in" and then he enacted every single Bush policy, and even kept their timelines? If you were a progressive left, you hated Obama as much as the American Taliban right hated Obama. He betrayed every single progressive ideal he supposedly stood for, including publicly and vehemently being against gay marriage for both presidential debates. He also signed the NDAA just before Christmas, which was the most anti-constitutional piece of legislation that you could conceive at the time. Obama kept talking about gun control, but Trump did more for gun control by banning bumpstocks than Obama ever did.
snapplebobapple 3y ago
The depression part is probably true, however, I don't believe there was no other option. The problem with what we did is we confirmed there is no risk to owning bank stock or lending to banks and that should never be true. Instead there needs to be full risk for shareholders, secondary risk to bond holders and depositors need to be protected because being reasonably sure all or nearly all of your deposit will still exist and be available in a timely manner is the main thing we need from banks. In that spirit, I think we could have done something/ written the laws to force something like the following to happen: 1. wipe out shareholders, convert bonds to common stock. 2. if the loss is so gargantuan that converting the bonds still leaves the bank insolvent, then wipe the bonds out too and offer shares up to certain value to depositors as conversion. If not enough convert then haircut depositors over a certain threshold for the rest up to a reasonable percentage of the negative equity and make up the rest with a government loan program at that point. The expectation should be that if you own a big bank and it does stupid things you are going to lose your money, if you are a bond holder of a big bank and it is doing stupid things you should expect to be converted and possibly lose money. The expectations as a depositor is you will have all your deposit up to a threshold protected and you may lose some above that temporarily but are likely to get it back with a nice return in time.
- JumpCrisscross 3y ago
  > I don't believe there was no other option. The problem with what we did is we confirmed there is no risk to owning bank stock or lending to banks and that should never be true There were better options. But it's unclear we would have found them in time. That's why we explored and enacted them aftewards. Which is what let First Republic, SVB and Signature fail last year, with investors being wiped out and no depositors impaired, so smoothly that it's no longer in popular memory.
  - no_wizard 3y ago
    Executives didn't go to jail and boardrooms weren't bankrupted en masse. Nobody had their bonuses clawed back and golden parachutes invalidated, and the government in all their power still allowed bonuses to be paid out with TARP money even as people were losing their jobs en masse. There was never any meaningful regulation that came to pass afterward that split the banks up. There were some marginal improvements to solvency requirements (which ironically were the standard before de-regulation in the 1980s and 1990s) and on the consumer banking side there is a little bit more protections, but nothing truly meaningful that limits downside exposure from the broader public ever got passed, let alone debated. Everyone was so fast to get back to "business as usual" you'd think nothing happened. What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole. By their own admission they did much the same in the 80s and 90s[0] [0]: https://www.fdic.gov/resources/publications/crisis-response/book/crisis-response-chapter-6.pdf https://www.fdic.gov/resources/publications/crisis-response/...
no_wizard 3y ago
TARP should have come with extremely strong regulation and bearing teeth. Fire the executives, claw back their bonuses and cancel their golden parachutes, and where proven to be culpable (which we now know, wouldn't have been hard to prove) should have served lengthy prison sentences. Essentially, bankrupt the boardrooms and executives involved and you send a very clear message about tolerance. There is no reason the decision makers at the top should have been able to use TARP cash to pay themselves bonuses. Its not all about the money, at the end of the day. Its what you do with it. It should have had more strings attached. The banks should've been broken up again to undo the nonsense de-regulations from the 1980s and 1990s that exposed "main street' to such speculation in the first place. Mind you, if individuals or smaller organizations did what the banks did, we would call them pyramid schemes and fraudsters and arrest all of them and prosecute them to the fullest extent of the law, not bail them out to continue business as usual
- hluska 3y ago
  TARP was a decision made in a remarkably short time while the global financial system was burning. And it had to be made while the United States was facing a systemic wide crisis. Moreover some of the major banks did not want the money. Some major employers in the United States were about to miss payroll. The most famous story was a McDonalds franchisee who was not going to be able to make payroll. They didn’t hold cash on hand and needed banks to keep rolling paper. When McDonalds franchisees cannot make payroll, there’s a potential for tent cities. If they had years, I’m sure things would have been different. Incidentally, Ben Bernanke got so sick of that line of questioning that he is no longer a registered Republican. He’s one of the people who pulled us back from the brink of recession and I don’t know he’s treated with the appropriate respect.

by hluska 3y ago

noja 3y ago

What about the "and afterwards" part, where the banks that were too big to fail were split up, and regulation was improved?

JumpCrisscross 3y ago
> What about the "and afterwards" part, where the banks that were too big to fail were split up, and regulation was improved? Whether TBTF banks should be split up is still being debated. With size comes resilience (and fewer books to look over). In terms of improved regulation, the fact that we're less than a year out from the second, third and fourth largest bank failures in our nation's history with seemingly no memory of it seems to speak for itself [1]. [1] https://en.wikipedia.org/wiki/List_of_largest_bank_failures_in_the_United_States https://en.wikipedia.org/wiki/List_of_largest_bank_failures_...
hluska 3y ago
I don’t understand your point, but yes, aspects of the US financial industry were improved as a result of the 2008 crisis. That happened because of roughly two years of work by congressional and senate oversight committees. Other things (ie - derivatives) were not properly regulated. If you’re interested in what one form of regulation could have looked like, you should look up Brooksley Born. Most specifically, what happened to her when she proposed regulation. Ben Bernanke spent so much time testifying and was so bothered by his experience that he used to be a registered Republican. Now he’s independent.
- deleted 3y ago
  [deleted]
- no_wizard 3y ago
  For anyone interested, here's a good summation of the Brooksley Born story[0]. Its a tragedy through and through. She faced harassment from all sides and her expertise was brushed off carelessly. Its really truly sad. The same thing happened to Raghuram Rajan from the IMF. He delivered a paper criticizing the financial sector entitled "Has Financial Development Made the World Riskier" which argued that disaster loomed. The paper, which proved accurate, was aggressively criticized by Larry Summers, who served as the director of the National Economic Council in the Obama Administration. He was also ostracized for expressing a legitimately dissenting opinion on how financial markets in their then current form were a great risk the global financial system [0]: https://www.sfgate.com/business/bottomline/article/Brooksley-Born-foresaw-disaster-but-was-silenced-2454453.php https://www.sfgate.com/business/bottomline/article/Brooksley...
  - hluska 3y ago
    That link is an excellent summary! It’s quite interesting because we can look back in time and find some excellent people who sounded the alarm bells. They all got trounced. I think if we can take any solace, it’s that Larry Summers did not serve as Obama’s Secretary of the Treasury. It went to Tim Geithner instead.

Aloha 3y ago

The Tea Party and malignant Trumpism would have developed under a president McCain as anything else.

eadmund 3y ago
I don’t think that’s true. The development of the Tea Party comprised several causes: the anti-constitutional attitudes of the Obama administration; Mr. Obama’s personal anti-American character; the general incompetence of the Obama administration; and, sadly, racism (I did not appreciate at the time how many of the folks who were vocal about the former factors were motivated by this last, utterly disgraceful, factor). These factors would have been lessened to one degree or another — or altogether missing — in a hypothetical McCain administration. Granted, hypotheticals are always tricky, and one can’t predict what sort of malignant reaction a McCain administration would have provoked.
- no_wizard 3y ago
  >the anti-constitutional attitudes of the Obama administration; Mr. Obama’s personal anti-American character; the general incompetence of the Obama administration These are some pretty big things to posit without some citations. Simply put I don't remember anything of this nature, at all, with the exception of the prevalence of racism. I'm not saying Obama and his administration didn't have faults (they sure did) but like I said, other than the prevalence of racism, nothing else rings true.
  - blindriver 3y ago
    You don't remember Obama's campaign of "Change we can believe in" and then he enacted every single Bush policy, and even kept their timelines? If you were a progressive left, you hated Obama as much as the American Taliban right hated Obama. He betrayed every single progressive ideal he supposedly stood for, including publicly and vehemently being against gay marriage for both presidential debates. He also signed the NDAA just before Christmas, which was the most anti-constitutional piece of legislation that you could conceive at the time. Obama kept talking about gun control, but Trump did more for gun control by banning bumpstocks than Obama ever did.

snapplebobapple 3y ago

The depression part is probably true, however, I don't believe there was no other option. The problem with what we did is we confirmed there is no risk to owning bank stock or lending to banks and that should never be true. Instead there needs to be full risk for shareholders, secondary risk to bond holders and depositors need to be protected because being reasonably sure all or nearly all of your deposit will still exist and be available in a timely manner is the main thing we need from banks. In that spirit, I think we could have done something/ written the laws to force something like the following to happen: 1. wipe out shareholders, convert bonds to common stock. 2. if the loss is so gargantuan that converting the bonds still leaves the bank insolvent, then wipe the bonds out too and offer shares up to certain value to depositors as conversion. If not enough convert then haircut depositors over a certain threshold for the rest up to a reasonable percentage of the negative equity and make up the rest with a government loan program at that point. The expectation should be that if you own a big bank and it does stupid things you are going to lose your money, if you are a bond holder of a big bank and it is doing stupid things you should expect to be converted and possibly lose money. The expectations as a depositor is you will have all your deposit up to a threshold protected and you may lose some above that temporarily but are likely to get it back with a nice return in time.

JumpCrisscross 3y ago
> I don't believe there was no other option. The problem with what we did is we confirmed there is no risk to owning bank stock or lending to banks and that should never be true There were better options. But it's unclear we would have found them in time. That's why we explored and enacted them aftewards. Which is what let First Republic, SVB and Signature fail last year, with investors being wiped out and no depositors impaired, so smoothly that it's no longer in popular memory.
- no_wizard 3y ago
  Executives didn't go to jail and boardrooms weren't bankrupted en masse. Nobody had their bonuses clawed back and golden parachutes invalidated, and the government in all their power still allowed bonuses to be paid out with TARP money even as people were losing their jobs en masse. There was never any meaningful regulation that came to pass afterward that split the banks up. There were some marginal improvements to solvency requirements (which ironically were the standard before de-regulation in the 1980s and 1990s) and on the consumer banking side there is a little bit more protections, but nothing truly meaningful that limits downside exposure from the broader public ever got passed, let alone debated. Everyone was so fast to get back to "business as usual" you'd think nothing happened. What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole. By their own admission they did much the same in the 80s and 90s[0] [0]: https://www.fdic.gov/resources/publications/crisis-response/book/crisis-response-chapter-6.pdf https://www.fdic.gov/resources/publications/crisis-response/...

no_wizard 3y ago

TARP should have come with extremely strong regulation and bearing teeth. Fire the executives, claw back their bonuses and cancel their golden parachutes, and where proven to be culpable (which we now know, wouldn't have been hard to prove) should have served lengthy prison sentences. Essentially, bankrupt the boardrooms and executives involved and you send a very clear message about tolerance. There is no reason the decision makers at the top should have been able to use TARP cash to pay themselves bonuses. Its not all about the money, at the end of the day. Its what you do with it. It should have had more strings attached. The banks should've been broken up again to undo the nonsense de-regulations from the 1980s and 1990s that exposed "main street' to such speculation in the first place. Mind you, if individuals or smaller organizations did what the banks did, we would call them pyramid schemes and fraudsters and arrest all of them and prosecute them to the fullest extent of the law, not bail them out to continue business as usual

hluska 3y ago
TARP was a decision made in a remarkably short time while the global financial system was burning. And it had to be made while the United States was facing a systemic wide crisis. Moreover some of the major banks did not want the money. Some major employers in the United States were about to miss payroll. The most famous story was a McDonalds franchisee who was not going to be able to make payroll. They didn’t hold cash on hand and needed banks to keep rolling paper. When McDonalds franchisees cannot make payroll, there’s a potential for tent cities. If they had years, I’m sure things would have been different. Incidentally, Ben Bernanke got so sick of that line of questioning that he is no longer a registered Republican. He’s one of the people who pulled us back from the brink of recession and I don’t know he’s treated with the appropriate respect.