Recent data released by the Federal Reserve sheds more light as to just how bad things really were in late 2008 - and arguably even today. This Washington Post article summarizes some of it: http://www.washingtonpost.com/wp-dyn/content/article/2010/12/01/AR2010120104658.html?sid=ST2010120106876. As we all should know at this point, the Fed was helping a lot more than was admitted to. I looked at what I think was the raw data behind this article (http://www.federalreserve.gov/newsevents/reform_cpff.htm ) and I looked at just the first 3 months of the data. Between the end of October 2008 and January 2009, the Federal Reserve purchased from securities dealers, banks and finance companies over $380 billion worth of commercial paper. Commercial paper is (was) typically considered to be the highest quality, most liquid type of capital market security. The fact that the Fed had to buy this paper means 2 things: 1) the banks, dealers and finance companies would probably not have been able to raise money (by selling these short-term investments they owned) without the Fed help (and therefore may have defaulted themselves). 2) The issuers of this commercial paper were most likely unable to borrow though the capital markets themselves, and thus may have also defaulted. The issuers (ultimate borrowers) of the paper included "good" companies like GE, Caterpiller, Toyota and Harley Davidson. So in effect, by being willing to buy commercial paper issued by these companies, the Federal Reserve was telling the shell-shocked capital markets to "Please calm down! - Look! We will buy assets from you if you get in a liquidity pinch yourself. So don't worry about buying commercial paper, because if you need to sell it you will always be able to look to us." This was just one small part of what was the implicit government guarantee of the financial system. It also is an indication of how quickly a financial crisis was going to translate into "real America". Defaults of major US companies were imminent and would escalate rapidly.
By the way, I spoke to a couple of people recently who claim that they received no benefit from the bailout. I contend that while we can look at some evil individuals who unfairly benfited by this disastor, the biggest aggregate group of beneficiaries are : anyone with a bank account, retirement plan, money market account, stocks, real estate and anyone who owns or works for a business who borrows money from anyone or who has customers with any of those assets. In fact, I would go so far as to say anyone who relies on a functioning civilization was a beneficiary.
I am amazed at the number of people who have, say, a retirement income and bank accounts, and think they are insulated from this issue. Just look at the balance sheet of a retirement fund or of a bank. You will not find your cash anywhere! Instead you will find things like stocks, real estate, business loans, commercial paper and deposits in other banks.
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There is no doubt the public benefited financially from the bailout in the ways you describe. But don’t expect people to be happy about it.
ReplyDeleteAnd I think most people asking questions about the bailout are missing the point. The issue is psychological, not financial. Of course we the people benefited from the bailout. But the people who were in charge of the banks are still in charge. The people who allowed this crisis to occur are still in positions of responsibility. The people who took the nation and all of civilization to the brink of collapse are receiving huge bonuses and are laughing all the way to their own bank every day. This is galling to many Americans.
People may say they are angry about the bailout, but perhaps they are really angry that nobody was punished for causing the crisis. Most people in this country live every day under the threat of being fired if they so much as say the wrong thing at the wrong time. People are fired for arriving late to work, or leaving early. Steal a dollar or some office supplies and you’re out the door. Make consistently poor management decisions and you’re replaced. This is the real world outside of Wall Street.
In this latest economic crisis nobody important was fired for their managerial incompetence. There were little to no consequences for the bad actors who were supposed to be managing the risk their companies were taking on. If this crisis was not enough to fire someone, what would have to happen before a Bank CEO is canned? How incompetent do they have to be?!
I think this is where the anger and frustration about the bailout comes from. Sometimes the owner of a sports team has to fire the entire coaching staff just to show the public they mean business about turning around the team. This was one of those times when the catharsis of a mass public firing was needed. It is not entirely rational, but the public needed to be shown that there are consequences for bad actions not just for the ‘little people’, but also for bankers in Goldman Sachs. Ronald Reagan fired the air traffic controllers. Obama should have fired the bankers.
Instead, it is business as usual on Wall Street. And the public is rightfully angry about it.