FedUpUSA

The Bailout Isn’t Working

 

Let’s revisit the theory of the bailout. The government holds a safety net under the financial system, preventing a worse panic, with consumers and business cutting back spending more radically, with more people losing jobs, with more houses going into foreclosure.

It made sense on paper and underlies claims today that the government has been a net profiter from its bailout activities.

But it becomes apparent that the 2008 crisis isn’t over. And our bailout strategy? In one presumed lesson of the Great Depression, a splurge of deficit-financed spending is supposed to support the economy while consumers and businesses get over their shellshock. But as George Soros noted to Der Spiegel, the U.S. government in the 1930s wasn’t saddled with huge debt. Unless today’s deficit spending is visibly directed at projects with a positive return, he says, it just frightens the public that the government itself is going bankrupt.

As we now know, the Obama stimulus did not fulfill the Soros condition—it consisted mostly of transfers to support the incomes of people who weren’t working or government employees who were already employed.

Under bailout theory, housing was supposed to hit bottom, but the bottom would be higher than if the economy had lapsed into depression. But housing hasn’t been allowed to hit bottom, thanks to policies designed to foil foreclosures and keep people in houses they can’t afford and have stopped paying for. As a result, the housing and construction industries remain paralyzed.

Surely one lesson of the Great Depression commands common assent: Do as FDR did and support demand with public spending, but, for goodness’ sake, don’t do as FDR did and vilify the private sector while burying it under untimely and confidence-sapping policy initiatives.

Oops. We haven’t executed very well on this lesson either.

Which brings us to Bank of America, successor to Citigroup as the problem child of American megabanks.

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Associated Press

Bank of America CEO Brian Moynihan.

When BofA agreed to buy Countrywide in 2008, the bailout was already in full swing. In carefully worded responses to investigators for the Financial Crisis Inquiry Commission (FCIC), then-CEO Ken Lewis said regulators showed “keen interest” in his planned takeover of the troubled mortgage giant, “but no one asked us to do the deal . . . nothing coercive.”

Mr. Lewis here is constrained by confidentiality rules. Wall Street analysts at the time were widely predicting Countrywide’s bankruptcy. As the Journal recently noted, “Regulators saw Bank of America as a savior for the tottering mortgage lender. They believed its failure could pose a major risk to the economy.”

Read the rest at the Wall Street Journal

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