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What We Could Have Done Differently - Barry Ritzholtz Presents The 2008 No Bailout Counter-Factual

Flashback from last year.

In a pointed riposte to the Blinder-Zandi paper, Barry Ritholtz presents an inconvenient fact for bailout apologists (who grow more numerous and hysterical as the Great Recession grinds on):  we were NEVER faced with the choice between A) Bailing out the banks, their executives and their bondholders at 100 cents on the dollar or B) Doing absolutely nothing while the world burned. 

It was a false choice then and it's a false choice now.  So why are PhD-wielding economists using this false choice as a basis for policy analysis?  And why are the financial media letting them get away with it?  Instead of joining this Idiots Parade, Ritholtz discusses the appropriate counter-factual:  what we should have done instead of choices A and B above.


We don’t have alternative universe laboratories to run control bailout experiments, but we can imagine the alternative outcomes if different actions were taken.

So let’s do just that. Imagine a nation in the midst of an economic crisis, circa September-December 2008.  Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history);  3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

In my counter factual, the bailouts did not occur.  Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper.  In the end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets.

Thus, Bear Stearns is not bailed out by the Fed.  Instead, under my scenario, the FOMC chair tells JP Morgan’s CEO:

  • “You have 9 trillion dollars in exposure to Bear derivatives.  Instead of guaranteeing you $29 billion for a risk free takeover, we will start preparing a liquidation plan for Bear.  And given your exposure to them, we best plan one for JPM too.  And if you don’t like that, you can kiss our ass!”




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Reader Comments (10)

"If 'ifs' and 'buts' were candy and nuts, we'd all have a Merry Christmas."
Aug 18, 2010 at 12:06 PM | Unregistered CommenterZ
z...amusing...and i know you are not a fan of looking back...but we have to...otherwise when the next round of bailouts are needed we'll get the same shit...bank bondholders will get 100 cents and taxpayers will get screwed...it's not purely mental masturbation...pitchfork can add his thoughts if he's still around...
Aug 18, 2010 at 12:16 PM | Registered CommenterDailyBail
Good read DB
I think (HOPE) the next time they ask for bail out money .Mr public tells them to fruk off
The economy has got so bad average people are feeling it hard and no longer letting
the evil media bullshit them . I dont know about you guys but when iu look around i dont see things getting better.
Aug 18, 2010 at 12:55 PM | Unregistered CommenterJTS
I agree JTS, the problem is that the majority was against the bailouts, yet the pubic servants gave them anyway. So much for majority rule...

The only people seeing green shoots are those receiving the bailouts.
Aug 18, 2010 at 4:14 PM | Unregistered CommenterS. Gompers
Fort Tungsten?
Aug 18, 2010 at 7:51 PM | Unregistered Commentermark mchugh
Hah, hah. Funny, Z.

But questioning the past NOW is critical. The ruling class, but especially Democrats, want to claim glory and victory for TARP and all the other bailouts and then "move on." Otherwise, the "mob" will be pissed at them, and may not vote them back into their sinecures. This would be tragic. For them.

NYC lawyer Jeff Snyder wrote an article about Obama's own victory lap for the Financial Reform [sic] Bill. O'Bankster says, "the American people will never again be asked to foot the bill for Wall Street’s mistakes." To which, Snyder responds:

"Again? Hey Congress and President, here’s a dose of truth for you! We weren’t asked to bail out Wall Street the first time! ... In fact, I pretty clearly recall that when then Treasury Secretary and ex-Goldman Sachs CEO Hank Paulson was demanding $700 billion in TARP funds from Congress, making threats that Americans would turn feral if the banking system collapsed and warning Congress that it would have to declare martial law, the American public, which wasn’t asked but which freely volunteered its opinions anyway, disapproved of the bailouts about 99 to 1."

"And by the way, when Obama promises, "never again," please note that what he is implicitly and really saying is that we’re not going to do anything about what happened this time. We’re letting them get away with it and we’re letting them keep the fruits of their plunder."

The ruling party is desperate to get away with their ill deeds. They're surprised the mob's memory is so long. Don't help them out by letting the past go gently into the night.
Aug 18, 2010 at 11:08 PM | Registered CommenterDr. Pitchfork
Yes mark...Fort Tungsten...pretty funny, eh...
Aug 18, 2010 at 11:31 PM | Registered CommenterDailyBail
Dr. P...My memory is so good that I still remember what Obama said when asked for his birth certificate…NOTHING!!!

He flew out to Hawaii and put whatever documentation that exists on him in the vault and sealed it. You remember Seinfeld. In the vault? Once it is in the vault, it created another legal hurdle to the truth of his lack of eligibility for POTUS.

You quote Jeff Snyder with gusto and confidence, “We’re letting them get away with it and we’re letting them keep the fruits of their plunder." “The ruling party is desperate to get away with their ill deeds. They're surprised the mob's memory is so long. Don't help them out by letting the past go gently into the night.”

Do you mean it?

If yes, let’s keep on asking for the proof that we all deserve.

What are you willing to do? What are you willing to remember?
Aug 18, 2010 at 11:33 PM | Unregistered CommenterZ
Oh, and don't ever forget David Kellermann.
Aug 18, 2010 at 11:34 PM | Unregistered CommenterZ
Can you imagine the wake up call this nation would get seeing Obama declared a pathetic fraud beyond the shadow of any and all doubts? Wow!!!! Never again would we trust a wolf in sheep's clothing. Think of how empowering it would be to see the Emperor actually has no clothes at all.

Isn't it all about questioning authority...



Or you will turn into this...sad and pathetic...

Aug 18, 2010 at 11:47 PM | Unregistered CommenterZ

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