Should Government Bail Out Big Banks? | 5 Minute Video

Should the government bail out big banks that may otherwise go bankrupt? Or should it let them go under, as it did with Lehman Brothers in 2008? Economist Nicole Gelinas, a fellow at the Manhattan Institute, has the answer, and it will have big implications for policymakers when they grapple with the next economic crisis.

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Script:

In 2008, America experienced the biggest meltdown of its financial sector since the Great Depression. The conventional wisdom is that this failure and subsequent government rescue, commonly known as "the bailout" was brought about by three decades of bank de-regulation. There were a lot of causes for the meltdown, but deregulation wasn't one of them. Ironically, it wasn't because the banks had become unmoored from government control that led them into the financial storm, it was because they had become too closely tied to government. For three decades Uncle Sam, like an enabling parent, had always "been there" when the big banks got into trouble. The shock in 2008 was that for one brief moment, Uncle Sam wasn't there.

In the wee hours of September 15, 2008, Lehman Brothers filed for bankruptcy. The financial industry waited for the Feds to step in and save Lehman bondholders like it saved those of Bear Stearns some months earlier. That didn't happen. Global financial markets seized up. As the Dow Jones Industrial average fell 498 points, or nearly 4.4 percent, financial institutions effectively went on strike. Banks wouldn't lend money to other banks and thus, indirectly, to the public because they had no idea which financial institution might go belly up next. The economy can withstand a stock-market crash, but a credit-market freeze -- essentially a cash freeze -- can cause a Depression, as credit underpins almost all business and personal activities. Indeed, some large companies, including General Electric, were so dependent on these short-term credit markets that they were in danger of not being able to pay their workers.

The financial industry pleaded with the government to act. Later in the same day, September 15, it did. The Feds wouldn't save Lehman's but it would save AIG, the primary insurer of mortgage loans. A month later, the Troubled Asset Relief Program (TARP), a $700 billion plan to pump taxpayer cash into America's banks and financial institutions was approved by Congress.

Public officials generally agreed that the free market had failed. In November 2008, President George W. Bush came to New York to explain 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 a global meltdown," he said.

But free-market capitalism had not melted down. Again, the problem was not that banks had been too free, but that they had grown too dependent on government over the last few decades. Here's a brief history.

America's first post-Depression bailout of a big bank came in 1984 when the Republican administration of Ronald Reagan, with help from the Federal Reserve bailed out Continental Illinois, the eighth largest commercial bank in the nation. The bailout introduced the phrase "too big to fail" to the financial media's vocabulary.

[ralphbernhard]

Privatize the profits, socialize the risks....

[Cygnus]

If the banks are too big to fail, they are too big to exist

[KA-iqko]

Government should NOT bailout big banks and corporations.
Corporations and should not be lobbying the government.
No lobbying. No bailouts. No corporate welfare.

[brandogg]

Very informative video. So the government is just a rich daddy paying for their daughter's broken Mercedes? Gotcha.

[Frankincensedjb]

“If the government were in charge of the Sahara desert, there would be no sand in five years.” Milton Friedman

[KingoftheSlavs]

Bailing out Big Banks using tax payers money doesn't sound really Capitalist, more like a Socialist idea. As a Libertarian I would say let the banks fall just like they did in Iceland and guess what new banks independent of tax payers money would emerge.

[RagingGoldenEagle]

Not to mention that the "regulators" are all either former bank executives or politicians who have been bought off with promises of a cushy bank executive job once their political career is over.  This is actually the main reason I am against government regulation, because after enough time the industry that is supposed to be regulated just ends up regulating itself, except at a much greater cost to us taxpayers.  Until they find a way to fix this, I can't support regulation.

[KabukeeJo]

Uncle Sam should do what they did in Iceland & jail the bankers instead of bailing them out. It worked in Iceland, & it can work here.

[hankreardenfan]

As Bernie says, if it's too big to fail, it's too big to exist.

[iREPda]

If it's too big to fail, it's too big to exist.

I love how this takes away the responsibility from banks. They seem to be like children that cannot be held responsible for their actions, nice.

[UGuitarTutorials]

Exactly. Regulation doesn't work. We need a free market for money. Money is a commodity. It doesn't need to be regulated. Regulation causes distortions, unintended consequences and favors special interests. The regulated have captured the regulators in banking. The Fed is a monopoly. The people gave this power to the banking system. Until the people understand this concept, nothing will change.

[Triumvirate]

I would just add that another huge contributing factor to the risky behavior of banks was that the government required, by law, that banks had to give loans to people who had low credit, because "Everybody has a right to their own home. Everybody has a right to the American Dream". The U.S. Government told banks they had to lend money to low-credit borrowers for home mortgages, and those loans were backed by them.

[tomio]

it's also crazy how we live in a world where these crashes in the market are just taken as a way of life, and not... stopped

[moracomole]

"Too Big To Fail?
that's like saying : Too fat to diet. What are you doing?"

[Derekivery]

It seems really disingenuous that this video does not bring up the fact that the federal reserve is basically a private bank itself.

If a bunch of bankers (private banks) ask another bunch of bankers (the federal reserve) for a bailout using government money (taxpayers money), why is anyone shocked that they pretty much always get it.

[brodyhagemeier]

The risk of failure is often enough to be careful.

[miks]

Please provide the number of bankers that faced jail time after the crash. ...

yeah... that's right.

[TheDailyDigest]

"free market"? We have no free market or Capitalism in the U.S.

[Steffenx]

I haven't seen anything this accurate in quite some time.