Bailouts have been a wonderful tool in the 21st century. During 2008 crisis, there was an unbelievable high ROI to them, both in the $ value of investments in the banks and in the global economic catastrophe it prevented.
It's not as simple as just looking at the ROI of an individual bailout; what if the crisis itself only happened at the level it did because of the expectation of the bailout in the first place?
> Notably, the Financial Crisis Inquiry Commission (FCIC), tasked by Congress with investigating the causes of the financial crisis, cited moral hazard as a component of the crisis, arguing that many factors, including deregulation in the derivatives market in 2000, reduced federal oversight, and the potential for government bailout of "too big to fail" institutions all played a role in increasing moral hazard in the years leading up to the collapse.
They also caused it by encouraging banks to make loans to people who couldn't afford to pay them back, to "promote home ownership".
The actual problem wasn't really regulatory, it was that they made a change to a complex system and nobody noticed what the implications were until it was already a Problem.
What happened was, mortgages were always considered safe loans, because if the borrower defaults then you repossess the house and sell it to recover the principal. Meanwhile banks would only make loans to people with good credit, because even if you can repossess the house, doesn't mean you want the trouble. So if you looked at the past, holding mortgages was a good investment.
Then they started allowing the banks to sell the mortgages to investors and for the investors to buy insurance against defaults. Which is fine if the investors/insurers are doing their homework and buying loans that are going to be paid back, but mortgages were considered safe, so they were basically not paying attention. There was a thing where they had some bundles of mortgages rated as AAA when they shouldn't have been, but that was more of a scapegoat for the institutional investors who should have known better to blame somebody else after things started going south.
The actual cause was this: Once the banks started selling mortgages to investors, they no longer cared if the borrower would pay it back, because now that's the investor's problem -- and the investors weren't paying attention. Meanwhile as soon as the bank sells the mortgage, they have the principal back from the investor and can go loan it out again and then sell that mortgage. And while this is happening the government is encouraging it because look at all of these new home owners. So now you have the banks giving mortgages to everybody regardless of creditworthiness, and that's what really caused it.
Because doing that creates a housing bubble, as all the people who can't actually afford a house can now bid up the prices by taking out a loan they won't be able to pay back. And the housing bubble in turn invalidates the assumption that if the borrower defaults you can recover the principal by repossessing the house, because now when the bubble pops, people end up underwater on their mortgages. The value of the house crashes and is now less than the loan principal. So when those borrowers start to default, the investors holding those mortgages and the insurers insuring them were lined up to get smashed. Oops.
I think you moved pretty quick past the part of why mortgages weren't safe.
Mortgages were given to people with no documentation allowed people to lie about their income and get loans they couldn't afford. That was alright because they had low introductory rates/payments they could afford. The market was getting more expensive and you could refinance to a better loan when you're LTV was more favorable before the balloon payments hit.
Those were the loans that were rated AAA.
Once the market growth slowed just enough to not allow the refinancing before the balloon payments, the defaults started, at first slowly then all at once.
If you're going to make a point of it then don't leave out the part about how it happened.
What they were doing was, they'd take a block of subprime mortgages and split them up into tiers. Basically they'd agree to wait to see who defaulted and then the top tiers would get all the mortgages people actually paid back and the bottom tiers got the ones they didn't. If 10% of the mortgages defaulted then anyone who bought at the 10th percentile tier gets all the defaults and everybody else gets paid. If 20% of them defaulted then the ones who bought the 20th percentile tier lose too, but the 30th percentile tier still gets paid.
The highest tiers were rated AAA, because for them to lose you'd have to have preposterously high default rates.
Then we started seeing preposterously high default rates.
That would be an excellent argument if the government were a for-profit enterprise. Since it's a government, the opportunity cost of what to spend money on at a critical moment in time when a lot of people are vulnerable seems like the better way to analyze the decision to me.
Although I'm sure this is mostly predicated on my political bias, I'm also reasonably confident that your analysis is as well. I'm not sure you're as aware of it though
The housing bailout also arguably worked extraordinarily well at preventing a much greater, prolonged loss / depression of value in real-estate. The largest bailout in world history went to US homeowners via the Fed de facto purchasing garbage mortgages to pull them off the market.
But isn’t that kicking the can down the road? Isn’t that the reason housing is incredibly over valued and wealth inequality is a huge problem here and around the world?
Yes, but "kicking the can down the road" has been the defining policy in most of the West for the last 60 years as it's what benefits the oligarchs. See, that metaphorical "can" here being kicked doesn't exist for them. It used to, but they rightly believed it wouldn't happen in their lifetime, and now it's locked in thanks to private drone armies if even the shadow of a "can" appears to be forming.
If we universally euthanize people once they reach a certain age and fail to pass certain capability tests, we'd also very likely see an ROI as the costs of maintaining the elderly and their increasing consumption could be put to more productive uses in the economy.
Still... something strikes me as just... well... morally wrong about that.
Ah, so we're redefining "pension" as a kind of "bailout" here? After all, if you think about it, isn't every healthcare intervention also a form of "bailout"? People's health should be allowed to succeed or fail without the moral hazard of bailouts!
(sarcasm marker, because there really are people who think like that)
Strong contender for most short-sighted comment I've read on HN. Second-order effects? Never heard of them! And if I did, they're all pure speculation anyway! And if they're not, they're much smaller than what was prevented! There was _no_ other option!
The people who "lost everything" were people who bought houses they couldn't afford by lying about their incomes. Counting on the bubble growing forever.
You are ignoring the many documented cases of predatory mortgage lenders encouraging elderly and otherwise infirm people to switch to the “lower rate mortgages”.
Acting like the only people who had these loan obligations were actively doing something wrong is a total myth.
Meanwhile Wells Fargo, who gave loans to dead people to meet quotas, was made whole and then fined a few token dollars.
The people who "didn't lose everything" were people who were lying about securities being AAA worthy while in reality being filled with subprime junk. Counting on getting bailed out and facing no consequences.
Subprime mortgages were subprime because there was no documentation given to prove incomes/debt of the people they were given to.
The people who defaulted on their mortgages did so because they couldn't afford them. The reason they got a loan that they couldn't afford was because they lied about either their income or their debts while getting the no-doc loans.
The failures in process that led yo the industry allowing people to lie to them without verification is another part of the story but it's completely dishonest to act like the people getting the loans they defaulted on had no agency.
"The reason they got a loan that they couldn't afford was because they lied about either their income or their debts while getting the no-doc loans."
No, they were offered loans at incredibly low rates that would be unaffordable if they rose at all. A large part of the scandal was about how the banks were offering loans to people that couldn't really afford them not that people were lying to get those loans.
This is basically correct, and should not be downvoted.
People forget why the retail banks were bailed out: because they're an essential service that is used on a daily basis! Imagine if you woke up one day and heard that Amazon was bankrupt, and therefore all AWS storage was going to be offline for 30+ days, and if a buyer could not be found the hard disks would be sold off at auction with no opportunity to retrieve your data.
And, yes, from this we can infer which tech companies are "too big to fail" and therefore would be bailed out if ever at risk of imminent bankruptcy and shutdown: the cloud companies. AWS, Google, Microsoft, and probably Cloudflare as well.
The Intel "bailout" was more like the General Motors one, good old fashioned manufacturing protectionism.
Americans should also note that almost all other countries with bank failures had comparable bailouts. A few exceptions: Iceland (failure of Kaupthing forced the UK government to bail out some local authorities who were banking with them!), and Cyprus ("bail in" with loss of money in high value accounts, basically because the EU deemed the country to be too deep in dodgy foreign money to be worth saving).
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