Do Large Banks Need Government Bailouts?

It’s been a while since the issue of economic bailouts for big financial institutions have made it to front page news; I haven’t heard of banks receiving government handouts lately, have you? But with economic signs signaling continued risk of an ongoing downtrend, the issue of bailouts may once more rear its head.

large banks, economic bailouts

Federal Reserve Ben Bernanke testified in a Congress appearance some time ago, that the Feds acted to prevent the U.S. financial crisis from spreading by bailing out large banks: “The deal, late in 2008, was part of Washington’s effort to rescue the troubled financial system.” Not everybody, of course, has agreed with that decision, as top Republicans in Congress have recommended that failing banks should be left to die: “John McCain and Richard Shelby, two high-profile Republican senators, have said that the government should allow a number of the biggest U.S. banks to fail.” Who is right and what would the consequences be?

Can We Trust Politicians?

Politicians and Wall Street have always had a cozy relationship which Main Street looks upon with total distrust. Millions of lobbying dollars have found their way as soft money to PAC committees and nobody has ever doubted that the quid pro quo has existed ever since the first democracy was created in Greece more than 2,000 years ago. Now translate this into what’s happened during the recent financial crisis, caused in part by a lack of government oversight due precisely to that “old boys” club alliance. One of the former SEC high ranking functionaries even stated that they couldn’t even imagine that the “respectable and respected” Bernie Madoff would ever pull such a gigantic Ponzi stunt; it would have helped had they paid attention to the early signs and alarms: “his repeated warnings that Wall Street money manager Bernard Madoff was running a giant Ponzi scheme have cast Harry Markopolos as an unheeded prophet.”

Do Large Banks Need Government Bailouts?

All this brings us back to whether it makes sense to save large banks and whether politicians should act as savior of the common people or rescuers of wealthy shareholders. Not long after President Bush announced a huge package of $250 billion to rescue the banks in Oct 2008, sharp reporters discovered and announced to a scandalized nation that lavish parties and bonuses were being bestowed on high executives in these failed financial institutions. It therefore makes sense to reject the bailouts, made with OUR money and not the government’s as some members of Congress seem to believe, because the only people who benefit are wealthy shareholders and top management. The ordinary guy like you and me is protected by the FDIC for up to $250,000 in each account in each bank. If the bank goes bankrupt, private accounts are not at risk and assets are either bought by other financial institutions or used to shore up the bank once it emerges from the process.

To Trust or Not To Trust

The other side, those who favor bailouts, claims that letting Lehman Brothers fail was a huge mistake because of the confidence factor. Ah, confidence — that famous hidden element that is rarely mentioned; yet Madoff was able to pull his Ponzi scheme thanks to the very trusting clients who worshipped the ground he walked on.

Just a minute you may say, is this about trust or greed? ‘Bernie, I trust you to give me a huge return on the millions I place in your “capable” hands.’ Am I greedy? Of course. I have $3 million and I still want more. Still, a few more victims were non-profit associations that suffered dearly, and that justified the 150 years sentence that Madoff ended up receiving.

The same kind of financial collapse happened with those famous derivatives that were based on toxic assets. Unscrupulous salespeople “guaranteed” that the scheme was insured and that nobody would lose. Instead, we found ourselves having to struggle to survive the credit and mortgage crisis. Meanwhile, our well-paid government agents continue to be asleep at the wheel.

What About the Little Guy?

Governments the world over have bailed out their biggest banks in order to apparently preserve the confidence of the people, but failed miserably to bring to justice the guilty parties, the recipients of huge bonuses and golden parachutes. Is that supposed to restore our trust in the financial system? Wouldn’t it be better from the Main Street point of view, to clean out these mismanaged banks and other institutions such as GM and Chrysler? Either let them fail or nationalize them, but stop pouring billion after billion of our tax money into toxic institutions, thus allowing the “bad” guys to continue making the wrong decisions. The ordinary people in this great country would like to see some bailout money coming their way to solve their own urgent problems. Let’s see… what do you think of the 2009 stimulus plan and the homeowner affordability and stability plan? How do you think these programs have panned out?

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