The Financial Crisis and the Second Great Depression Myth
All knowledgeable D.C. types know that the TARP and Fed bailout of Wall Street banks five years ago saved us from a second Great Depression. Like most things known by knowledgeable Washington types, this is not true.
Just to remind folks, the Wall Street banks were on life support at that time. Bear Stearns, one of the five major investment banks, would have collapsed in March of 2008 if the Fed had not been able to arrange a rescue by offering guarantees on almost $30 billion in assets to J.P. Morgan.
Fannie Mae and Freddie Mac both went belly up in September. The next week Lehman, another of the five major investment banks did go under. AIG, the country's largest insurer was about to follow suit when the Fed and Treasury jury-rigged a rescue.
Without massive government assistance, it was a virtual certainty that the remaining three investment banks, Goldman Sachs, Morgan Stanley, and Merrill Lynch, were toast. Bank of America and Citigroup also were headed rapidly for the dustbin of history. It is certainly possible, if not likely, that the other two giant banks, Wells Fargo and J.P. Morgan, would have been sucked down in the maelstrom.
In short, if we allowed the magic of the market to do its work, we would have seen an end to Wall Street as we know it. The major banks would be in receivership. Instead of proffering economic advice to the president, the top executives of these banks would be left walking the streets and dodging indictments and lawsuits.
This was when they turned socialist on us. We got the TARP and infinite money and guarantees from the Fed, FDIC, and Treasury to keep the Wall Street crew in their expensive suits. All the politicians told us how painful it was for them to hand out this money to the wealthy, but the alternative was a Second Great Depression.
It's not clear what these people think they mean, but let's work it through. Suppose that we did see a full meltdown. The commercial banks that handle checking and saving accounts and are responsible for most personal and business transactions would then be under control of the FDIC.
The FDIC takes banks over all the time. This would be more roadkill than it was accustomed to, but there is little reason to think that after a few days most of us would not be able to get to most of the money in our accounts and carry through normal transactions.
Credit conditions would likely be uncertain for business loans for some time, as in fact was the case even with the bailouts. Mortgage credit would have been provided by Fannie Mae and Freddie Mac, as has been the case since September of 2008.
One item deserving special attention in this respect is the commercial paper market. This is the market that most major businesses rely upon to meet regular payments like payroll and electric bills. When he was lobbying Congress for the TARP, Federal Reserve Board Chair Ben Bernanke said that this market was shutting down, which would in fact be disastrous for the economy.
What Bernanke neglected to mention was that he unilaterally had the ability to support the commercial paper market through the Fed. In fact he announced a special lending facility for exactly this purpose, the weekend after Congress approved the TARP.
It is also worth ridiculing people who say the government made a profit on its bailout loans. It's true that most loans were repaid with interest. However these loans were made to favored borrowers (Wall Street banks) at far below the market interest rates at the time.
The Congressional Oversight Panel commissioned a study on the subsidies involved in just the first round of TARP loans. The study put the subsidies at a bit more than 30 percent of the money lent out, implying bank subsidies of almost $80 billion from just this small segment of the bailout. Adding in other loans and various implicit and explicit guarantees would certainly increase this number considerably.