There is a huge structural issue when investors of all asset classes believe the central government will bail them out. It happens to a vastly lesser degree elsewhere. We saw the folly of it in the US in 2008.
It is still happening with home prices in many, many countries. Too many older people with too much of their net worth tied up in their homes. Essentially governments in many countries discovered, perhaps on accident, that pumping up the prices of homes was an easy way to fund the retirements of much of the older generation without explicitly raising taxes.
The bubble essentially cannot pop because too many people would end up underwater or lose most of their savings - this is a huge political issue. But on the other hand, the bubble cannot continue indefinitely, because if home prices outstrip inflation and wage growth for too long, eventually nobody will be able to purchase a house at all - this is the economic issue. This is not only happening in the US but also many other Western countries and in countries like China (exacerbated by their lack of investment vehicles).
I don't know if the structural issue was people believing the US government would bail them out. The issue was probably more that we actually bailed them out. I can't really blame rich and powerful bankers for thinking we were gonna do something that we normally do for them.
Stop bailing them out, and they'll stop believing they're gonna be bailed out.
I worked for one of the large banks that got out of this crisis pretty much unscattered. The Friday before TARP was introduced, which ended the succession of large banks collapses in the aftermath of Lehman, we were told internally that we didn’t think we could last more than a couple of weeks in the current market. And if we only had a couple of weeks left, most of the other (weaker) institutions had much less.
Like for the cuban crisis, I think it is easy to forget how close we got to the brink. We have already witnessed a complete collapse of the banking system in 1929, in a world that was much less inter-dependent than it was in 2008. It is survivable but it is ugly.
Nobody wants a banking collapse. The question is whether the people who caused the collapse and profited greatly should get bailouts and keep their money.
In my view the government should have supported the system but not single banks. Let them go down and make sure that executives end up with zero money. Their lifetime contribution to the economy was negative so their bank accounts should reflect that.
I agree with you but there was a lot of talk about other approaches like nationalization but they got shot down quickly so the only path left was what the bankers wanted. I still find it hard to believe that the people that ran their banks into the ground walked away with hundreds of millions of dollars.
I still remember how all the people who made decisions or got hired in Washington during that time had an investment banking background, ideally Goldman Sachs. It was infuriating.
I don't really think keeping the financial system (which is an integral part of an economy) functioning is the same as keeping an asset bubble afloat.
The US gov. certainly didn't stop the real estate bubble from bursting. It merely stepped in to recapitalize banks, and got its money back with interest in the process of keeping the financial system from falling apart. At the time, everyone was gearing up to make a run on the banks to get their money out first.
The problem is that not bailing out may have been more painful than anything involved. The only US guide for this was when Hoover let the banks go into free-fall in 1929, which didn't get resolved until Roosevelt stabilized them in 1933. Are we willing to pay the price to do the right thing?
