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Comment by Rury | Hacker News Reader

I mean to be fair, bailing them out, was also bailing us out. Banks can borrow some of people's money to fund mortgage loans. It just happened many loans at the time did so, and soured due to irresponsible lending. If they didn't bail them out, and you had 20k deposited in a bad bank; good chance it was simply gone. Bailing out the banks, guarantied that the innocent people got their deposited money back.

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Bailing them out does not mean bailing them out with zero consequences. Regulators have a lot of levers to pull there and should have used that. Splitting them up, taking them over outright, strengthening postal banking, loan forgiveness, banning instruments, they could have easily used the chance to negotiate the banks into making painful compromises that would have greatly benefited society. But they didn't and just gave them free money instead.

Those are all possible but they would have hurt the US financial dominance on the world stage. A lot of those decisions are ultimately based on imperial goals, not on the wellbeing of the citizenry (in the near term anyway, I'm pretty sure the people making those decisions believe they are thinking long-term.)

They didn't want the US banks to be bought out by Asian or European interests.

Or they could have just not bailed them out. Just because the finance guys way they are the most important thing in the world doesn’t mean we have to believe them.

I totally agree with you, however when society at large is built on the back of such a belief, you can't just pull it out from under everyone overnight without major collateral damage.

I don’t disagree - I think Lehman Brothers was a great example that you can have a giant bank go under. The productive assets of Lehman were back at work within six months and the value destroying units disappeared. I think had the Fed/Treasury let Bear Stearns go bankrupt instead of making JPMC swallow them (same for BofA and Merrill Lynch) it might have ripped the band aid off, rather than dragging it out.

But importantly — bailing out the banks isn’t really bailing out the banks, it’s bailing out the banks’ creditors.

Bailing someone out should come with an ownership stake.

> and you had 20k deposited in a bad bank; good chance it was simply gone

If the bank was FDIC insured (nearly all US banks are), or a credit union that is a member of the NCUA (nearly all US credit unions are), the customers are insured up to $250k per insured account type.

https://www.fdic.gov/resources/deposit-insurance/faq/

https://www.ncua.gov/files/publications/guides-manuals/NCUAH...

It seems an awful lot like the Wall Street explanation was "If you don't give us rich guys lots more money then poor people will lose money." Couldn't we have let the corrupt and incompetent banks go broke while giving money to the individuals who lost money? Like, bailout retail instead of Wall Street?

> Like, bailout retail instead of Wall Street?

That’s a nice sentiment, but on a practical level what does that really mean? Who do you want to cut checks to, and for how much? And more importantly why?

As a taxpayer, why should someone who lost money get mine? If some retail investor put money with one of your so-called “corrupt and incompetent” banks why should they be made whole with my money?

The ideal would be a universal basic income where if you make bad bets, you start back at the UBI level. There is no special bail out for someone based on how much they lose, simply a constant, level bailout for everyone.

There's no reason why the fed shouldn't insure deposits to 100%. Then badly run banks really could go bust with no risk to the general population.

The bailout was required to keep the financial system running which keeps literally everything else running. Supply chains would have broken down overnight without the availability of capital. If the major financial firms had shut down it would have had much worse effects than people losing their savings.

You are describing a hostage situation. I would hardly consider that a healthy economy nor something worth defending.

We are the hostages.

That's fine, there were other options, we could have bailed the banks out financially to keep the economic wheels turning, and convicted a few bank executives to send a message that there are real world consequences to a group who are far too comfortable with fines being the cost of doing business.

Too big to fail? Dubious, but ok.

Too big to jail? No. Throw a CEO behind bars and the finance industry keeps on going but it scares the shit out of others who would misbehave.

Convicted them of what? Or maybe you don't care?

If we take the example of blending junk rated mortgage backed securities with AAA rated securities then selling the whole lot as AAA securities, fraud seems to be an obvious starting point.

What you describe is exactly the issue, because there's no "obvious fraud". You need to understand these instruments, simply:

Banks didn't deceptively mix mortgages (which isn't fraud, anyway) and sell them to unassuming buyers. They constructed portfolios of mortgages (assuredly some good, some bad), a third-party rated those new financial instruments as AAA without fully accounting for risks, and sophisticated buyers purchased those instruments, also without fully understanding the risks.

If anything, the blame should be on the pension funds and large institutions who purchased these things and who pay people large salaries to manage this money. But I have a hard time seeing fraud in this process.

I mean, you can read this in The Big Short. Characters like Michael Burry read the prospectus' for these securities and could see what was in them, thought much of it was crap, and made their investment decisions based on that. Anyone who purchased the instruments had the same opportunity, and in the case of pension funds the obligation to do so.

Everyone simply thought “real estate only goes up.” In valuing the mortgage, the credit worthiness of the borrower was secondary to the value of the home, and the data still bears out half the story. In rising real estate markets mortgages simply don’t default. Problem is, everyone forgot real estate can go down.

I don’t think you understand securitization or bond ratings.

and in its wake would be left space for more resilient structures to emerge.

i’m not saying “let it collapse”: a government has a duty to protect its own citizens of course. but i do think the myopic view which subsidizes a system once it becomes too big to fail runs counter to long-term prosperity by making the local optima more trapping than they would otherwise be.

It’s a myopic view to not throw supply chains into turmoil? This would be like letting your production service go down completely and instead of trying to bring it back up first you decide this is the perfect time to refactor it.

the myopic view: of or focusing on only the present. never did i say the antidote is to take a hyperopic view. obviously the appropriate view will lie somewhere in between. i even went out of my way to clarify that the extreme hyperopic view is not what i advocate (my second sentence). it's only my point that we leaned (continue to lean) further to the myopic direction because we don't really understand (or appreciate) the extent to which this impacts things over any other timescale.

(Apologies for the misinterpretation; thanks for clarifying)

No bailout weren’t required. We shouldn’t have support their risky behavior by bailing them out. They and their counterparties deserved to lose their shirts. Instead the consumers who took did imprudent cash out refinances lost their shirts. Wall Street firms deserved the same fate for their bad choices, but instead Wall Street got nailed out.

It’s nice to say don’t bail them out — until the ATMs go dark.

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