Financial systems bailout

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With the intervention of the Federal Reserve into the Bear Stearns mess, Paul Krugman sees a bigger bailout of our financial system on the horizon.

As Bear goes, so will go the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money.

I remember the savings and loan debacle. We were supposed to have learned something at that time that would avoid such things happening again. Instead, motivated by – what else? – greed, we find ourselves about to spend taxpayer dollars to do it again.

I guess the free market works as long as government is there to bail it out when it doesn’t.

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19 thoughts on “Financial systems bailout”

  1. Of course I simplified the S&L crisis, otherwise the post would be so long no one would read it.

    The artificial rise in interest rates certainly hurt, but note that other S&L’s that were not invested in the Oil Patch made it through in spite of that problem. The only S&L’s that failed were those with large portfolios in the Oil Patch, because the rise in home prices elsewhere due to inflation kept other S&L’s adequately capitalized to ride it out.

    But for those which had much or all of their security based on Oil Patch real estate, there was no chance to survive. Though other factors contributed, that localized collapse in real estate value was the overriding factor.

    BTW, we were not importing natural gas from OPEC. And yes, Smith did have a deep distrust of banking, but he also accepted a job as a bureaucrat while railing against them. He was a genius, but also a weird duck.

  2. TB – thanks for chiming in here. I was hoping you’d come over and share your expertise. And good to know that I was right in thinking that we were supposed to have learned something from the S&L crisis.

  3. I don’t have a problem with simplification…my problem is you’ve oversimplified to the point of being wrong. (plus your post wasn’t that brief) (i get it though…neither was mine)

    You ignore the major factors that turned this into a “crisis.” The deregulation allowed S&Ls to take on riskier investments, operate with inadequate capital reserves, write-off debt as goodwill then record it as an asset in their financial statements….they violated generally accepted accounting principles.

    “because the rise in home prices elsewhere due to inflation kept other S&L’s adequately capitalized to ride it out.” No……the S&L crisis occurred at the same time the bottom fell out of other (non-oil) real estate markets in the country, albeit for other reasons.

    “BTW, we were not importing natural gas from OPEC” Yes – thanks. I am aware of that. I was responding to your statement: “Carter’s interference destroyed the domestic petroleum industry” and your references to OPEC and the related problems in the petro market.

    “[Smith] was a genius, but also a weird duck.” Ha ha….they usually are.

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