Why was everyone so afraid in the Fall of 2008?
Posted by Cheyenne.
The story, as Maude would say, is ludicrous: we bailed out the mega banks to prevent an even bigger depression than the one that ensued; we bailed out the mega banks so companies could make payroll; we bailed them out so our ATM machines would keep working; to stave off attacks by giant lizards.
No one has ever produced a shred of evidence to support any of these assertions.
Moreover, the evidence that has emerged since the TARP bailout passed has uniformly undercut the factual claims made in support of the bailout. Credit markets tightened up?
The Federal Reserve itself debunked this claim with contemporaneous data years ago.
And yet the myth that the bailouts saved us from peril persists to this day. The main force behind the myth’s staying power is the passion of its promoters: they seem genuinely scared that something earth-shattering was about to happen in early October 2008.
Ignoring the clichéd and inherently speculative doomsday scenarios, we had never even seen a high-ranking official from the government address this narrowly factual question: exactly what set of financial conditions spooked officials into agreeing to a $700 billion bailout?
That changed yesterday, when Sheila Bair, who headed the FDIC from 2006-11, showed up for an online Q&A about her first-hand insider’s account of the crisis, Bull by the Horns, held at firedoglake.
Any number of luminaries participated in the discussion, which ran some 175 entries, but the question most pertinent here—no. 39 in the thread—was lodged by someone calling herself MauiMom. Referencing an earlier discussion in which her question went unanswered, MauiMom asked Ms. Bair as follows:
"I'd like to revisit a question I ask every time this topic comes up, but for which I never get an answer. Could you [and/or Bill Black] talk some about what ‘great crisis’ was ‘averted’ in 2008-09 by plying the banks with all of that taxpayer money? Paulson is running down the hall with his 3 page memo about how HE should be given billions to distribute to the banks, and the financial end of the world is predicted, but really, what did they fear? And what other paths could they have taken when confronted with the massive fraud and mismanagement?"
After asking this question numerous times, of numerous accomplished folks, I still don’t feel like I have an answer: what WAS this big, scary, "meltdown of the financial system" or whatever that herded Congress and the Administration to rush through TARP and shower money on the banks?
To Sheila Bair’s credit, and befitting her book’s title, she addressed--in thread entry no. 50--MauiMom's question head-on. Here is what Ms. Bair said:
You are right to ask this question. All the trillions we threw at these banks – if you include all the Fed loans– the public deserves better analysis and explanation. In late 2008, we were dealing with a liquidity crunch. Too many large institutions borrowed from each other to fund themselves with short term loans – what is called the “wholesale” market. Ironically, even as Main Street depositors were leaving their money in the banks, the banks themselves got scared and didn’t want to lend to each other.
Another source of bank funding – money market funds – were also cutting off the spigot. So that while most were solvent – they had enough capital to bumble through- the short term funding they used to maintain operations was being disrupted. That was the main problem that needed to be fixed in late 2008, and in retrospect, it could have been fixed with a lot less money. The bigger problem for the economy was the huge number of troubled mortgages, but we never really fixed those.
Kudos to Ms. Bair for answering the question. We’ll leave a discussion of the answer’s ramifications and merits for another day.
Blood in the streets if the bailout is not passed...
"Bow your heads before Henry Paulson..."
The famous 'Paulson threatened martial law' speech from Brad Sherman.
Sherman exposes the Kanjorski-Paulson martial law, blood-in-the-streets fear mongering, which as we've demonstrated on multiple occasions was nothing more than highly granulated hyperbole meant to frighten a financially illiterate Congress and media corps into gentle acquiescence to the demands of their Sith Lords.
TARP was one giant lie designed to fleece taxpayers and benefit bankers. And despite overwhelming public opposition, it worked.
The reason why is even more distasteful to contemplate:
Congress is populated by members with extremely low financial IQs. Eyes glaze over, knees get weak, and the checkbook opens automatically. Talk about ATMs failing and you'll get whatever bailout you need, Sir Paulson.