Should Government Bail Out Big Banks?|5 Minute Video

Should the federal government bail out big banks that may otherwise declare bankruptcy? Or should it let them go under, as it made with Lehman Brothers in 2008? Economic Expert Nicole Gelinas, a fellow at the Manhattan Institute, has the response, and it will have huge implications for policymakers when they face the next recession.

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Script:

In 2008, America experienced the most significant meltdown of its monetary sector given that the Great Depression. The conventional knowledge is that this failure and subsequent government rescue, commonly referred to as “the bailout” was caused by three years of bank de-regulation. There were a lot of causes for the disaster, but deregulation wasn’t one of them. Paradoxically, it wasn’t because the banks had become unmoored from federal government control that led them into the financial storm, it was since they had actually become too closely connected to federal government. For three years Uncle Sam, like a making it possible for parent, had constantly “been there” when the big banks entered trouble. The shock in 2008 was that for one quick minute, Uncle Sam wasn’t there.

The monetary industry waited for the Feds to step in and conserve Lehman shareholders like it saved those of Bear Stearns some months previously. As the Dow Jones Industrial average fell 498 points, or almost 4.4 percent, financial organizations effectively went on strike. Banks wouldn’t provide money to other banks and therefore, indirectly, to the public since they had no concept which monetary institution might go stubborn belly up next.

The financial market pleaded with the government to act. Later in the very same day, September 15, it did. The Feds wouldn’t conserve Lehman’s but it would conserve AIG, the primary insurance company of mortgage. A month later on, the Troubled Asset Relief Program (TARP), a $700 billion plan to pump taxpayer money into America’s banks and financial institutions was authorized by Congress.

Public authorities typically concurred that the free market had stopped working. In November 2008, President George W. Bush concerned New York to discuss why he, a Republican president, had signed TARP into law. “I’m a market-oriented guy, but not when I’m faced with the prospect of an international meltdown,” he stated.

Free-market commercialism had not melted down. Once again, the issue was not that banks had been too free, however that they had grown too dependent on government over the last few decades. Here’s a quick history.

America’s very first post-Depression bailout of a huge bank can be found in 1984 when the Republican administration of Ronald Reagan, with aid from the Federal Reserve bailed out Continental Illinois, the eighth largest industrial bank in the country. The bailout introduced the phrase “too huge to fail” to the financial media’s vocabulary.

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source

Should the government bail out huge banks that may otherwise go bankrupt? The standard knowledge is that this failure and subsequent federal government rescue, frequently known as “the bailout” was brought about by three years of bank de-regulation. Paradoxically, it wasn’t due to the fact that the banks had actually become unmoored from federal government control that led them into the monetary storm, it was since they had actually become too closely tied to federal government. Banks would not provide cash to other banks and hence, indirectly, to the public since they had no idea which financial institution might go stubborn belly up next. Once again, the issue was not that banks had actually been too totally free, however that they had actually grown too dependent on government over the last couple of years.