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They dumped truckloads of cash on banks who were rather suddenly (??) severely undercapitalized. That's a bailout to most people.

photon137 14y ago
These were loans - albeit on very easy terms, I agree. The difference between a government bailout (which the Treasury did, in fact) and a Fed's "lender-of-last-resort" loan is crucial. The former involves recapitalization of the bank with an equity stake transfer to the Treasury while the latter is just a credit/repo line which allows for potentially "bad" or illiquid assets to be pledged as collateral for a loan. Again, this is a credit-risk transfer to the Fed rather than a bailout. Exactly in the same way as the banks took on credit-risk by lending to people with poor credit histories (although the intentions of the lenders were totally different in this case - greed being the dominant factor).
- damoncali 14y ago
  That is a distinction without a difference.
  - photon137 14y ago
    I agree - I didn't explain this very well. The former utilizes taxpayer money, the latter doesn't. The first is an all-out investment, the second, a loan. Also, the portion of the cash that is not used by the bank is usually deposited back at the Fed in the bank's excess reserve account (on which the Fed has now begun paying a small interest - in order to avoid capital destruction). The portion that is used forms part of the liquidity injected into the overall system - which is the Fed's original intention anyway. The Fed has a mandate to ensure financial stability by providing such a loan facility (why it didn't do so for Lehman - and whether it neglected its duty - is still a very controversial topic) - so I wouldn't consider a statutory duty to be a discretionary bailout.
    - damoncali 14y ago
      I wouldn't consider a statutory duty to be a discretionary bailout. Perhaps. But when you leverage 100 to 1, fail, and the feds swoop in to avert disaster (the jury, of course, is still out on this), it's hard to say that it's just a normal day at the office. They spent/created huge amounts of capital that was necessary only because of the excessive (and stupid, even at the time) leverage of the financial industry. Now don't get me wrong. I have a strong suspicion that Paulson is the most under-appreciated man in the world right now, literally. But we are all paying for an unnecessary excess, to keep failed institutions alive (save for poor Lehman. If it were only so easy as to just let them all fail). So I think the word "bailout" is apt.
      - photon137 14y ago
        Of course - what the banks did back then was plain and simple wrong. Even what they're doing now (dabbling in structured credit products like JP Morgan's ~ $3B loss) is stupid. Plus they're getting cheap cash from the Fed to finance their activities. The trouble is - the economy needs liquidity at the consumer level and it's the banks who should provide that. If the Fed had the authority to knock on everyone's door and lend them money at 0-0.25%, it would do that. But sadly, the political class never creates regulations which force the banks to pass on the liquidity provided by the Fed - after all, that would leave the banks with less profits and lesser money still to donate to political campaigns. As far as your comment on "let them all fail" - I disagree. For all the undeserved liquidity that the banks are currently enjoying, it is a far more benign evil than having all the banks fail - US Inc would probably still be firing 200,000 people every month instead of adding 100,000 (as it is doing now).
        damoncali 14y ago
        Obviously, you can't let them all fail, but if you don't let significant banks go under, how do you address the systematic moral hazard that encourages this behavior? It's a big problem, that, if anything, is worse now than it was in 2008.
        14y ago

photon137 14y ago

These were loans - albeit on very easy terms, I agree. The difference between a government bailout (which the Treasury did, in fact) and a Fed's "lender-of-last-resort" loan is crucial. The former involves recapitalization of the bank with an equity stake transfer to the Treasury while the latter is just a credit/repo line which allows for potentially "bad" or illiquid assets to be pledged as collateral for a loan. Again, this is a credit-risk transfer to the Fed rather than a bailout. Exactly in the same way as the banks took on credit-risk by lending to people with poor credit histories (although the intentions of the lenders were totally different in this case - greed being the dominant factor).

damoncali 14y ago
That is a distinction without a difference.
- photon137 14y ago
  I agree - I didn't explain this very well. The former utilizes taxpayer money, the latter doesn't. The first is an all-out investment, the second, a loan. Also, the portion of the cash that is not used by the bank is usually deposited back at the Fed in the bank's excess reserve account (on which the Fed has now begun paying a small interest - in order to avoid capital destruction). The portion that is used forms part of the liquidity injected into the overall system - which is the Fed's original intention anyway. The Fed has a mandate to ensure financial stability by providing such a loan facility (why it didn't do so for Lehman - and whether it neglected its duty - is still a very controversial topic) - so I wouldn't consider a statutory duty to be a discretionary bailout.
  - damoncali 14y ago
    I wouldn't consider a statutory duty to be a discretionary bailout. Perhaps. But when you leverage 100 to 1, fail, and the feds swoop in to avert disaster (the jury, of course, is still out on this), it's hard to say that it's just a normal day at the office. They spent/created huge amounts of capital that was necessary only because of the excessive (and stupid, even at the time) leverage of the financial industry. Now don't get me wrong. I have a strong suspicion that Paulson is the most under-appreciated man in the world right now, literally. But we are all paying for an unnecessary excess, to keep failed institutions alive (save for poor Lehman. If it were only so easy as to just let them all fail). So I think the word "bailout" is apt.
    - photon137 14y ago
      Of course - what the banks did back then was plain and simple wrong. Even what they're doing now (dabbling in structured credit products like JP Morgan's ~ $3B loss) is stupid. Plus they're getting cheap cash from the Fed to finance their activities. The trouble is - the economy needs liquidity at the consumer level and it's the banks who should provide that. If the Fed had the authority to knock on everyone's door and lend them money at 0-0.25%, it would do that. But sadly, the political class never creates regulations which force the banks to pass on the liquidity provided by the Fed - after all, that would leave the banks with less profits and lesser money still to donate to political campaigns. As far as your comment on "let them all fail" - I disagree. For all the undeserved liquidity that the banks are currently enjoying, it is a far more benign evil than having all the banks fail - US Inc would probably still be firing 200,000 people every month instead of adding 100,000 (as it is doing now).
      - damoncali 14y ago
        Obviously, you can't let them all fail, but if you don't let significant banks go under, how do you address the systematic moral hazard that encourages this behavior? It's a big problem, that, if anything, is worse now than it was in 2008.
        14y ago