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Explaining the Financial Crisis and the Bailouts
by Julian X  /  non-fiction  /  18 Dec 2009

It's understandable that so many are upset over the bank bailouts, one under Bush and the other under Obama.  It often seems like already rich bankers are getting tax dollars, while normal people struggle financially and the economy seems to be crashing anyway.  "Where's my bailout?" seems to be the manta.  After all, banks are still giving huge bonuses to their C.E.O.s and employment's still over 10%.  It's easy to be outraged, Michael Moore-style, when you just hear a superficial description of the situation.

But the outrage doesn't take into account why the bailouts were done.  It wasn't to bailout banks at all.  Sure, it did that, but it wasn't done to line bankers' pockets.  It was done to keep the economy from utterly crashing, and it's done that.  And you can't do that without helping the banks.

HEDGING YOUR BETS

A lot of people blame how banks were trading complex financial instruments, not only bundles of mortgages but insurance on those mortgages.  And it's easy to prefer people buying and selling real things, rather than stocks and mortgages and insurance and even more complex instruments.

But there's nothing wrong with trading futures, fundamentally.  Consider this:  Mike, your buddy, needs $20,000 to help start a business.  You loan it to Mike, expecting to be paid $40,000 over the next ten years as his business gets up and running.  But you're not 100% sure Mike's going to repay you, and you don't want to lose that whole $20,000.

Enter your other buddy, Jimmy.  Both you and Jimmy believe that Mike's business will probably succeed, but you're anxious about your big bundle of money.  So Jimmy decides to share the risk.  He offers to insure your loan to Mike.  The insurance will cost $3000.  If Mike goes belly up, Jimmy will give you your initial $20,000 back, out of his own pocket.  If Mike succeeds and repays you, you're only out the $3000 you paid for the insurance, but that's okay because Mike's paying you a profit of $10,000.

Your loan to Mike is like a bet.  You're betting $20,000 his business will work.  If it does, you win $10,000.  If it doesn't, you'll lose your bet.  But that's a lot of risk.  Jimmy's insurance is a way of managing that risk.  With Jimmy, you're betting $3000 against your initial bet.  In other words, you're hedging your bets.  If Mike does well, you get $40,000 from him, lessened only by the $3000 you paid for the hedge with Jimmy.  You're still up $17,000.  If Mike fails, you lose the $20,000 you gave him but get $20,000 from Jimmy, and you're only out the $3000 you paid for the hedge.  And this a lot better than the prospect of losing everything.  So it's a good hedge because it's successfully managed your risk.  You've eventually turned your win-big-or-lose-everything bet with Mike into a win-almost-as-big-or-lose-a-little bet, which lets your breathe a lot easier.

It's important to understand that this goes on all the time.  Your insurance from Jimmy isn't producing anything.  It's not starting a business, for example.  It's just an agreement on paper.  It is a financial instrument, pure and simple.  But without it, maybe you wouldn't feel comfortable loaning $20,000 to Mike.  Because you really don't want to lose all that money.  So Mike gets his business, you get good odds of a profit ($17,000) with little risk ($3000), and Jimmy's happy too, because he thinks Mike's going to succeed and he just got $3000 for nothing.  But without the insurance, you wouldn't loan to Mike, so Mike's not happy, and neither you nor Jimmy stand to make any money.

And the importance of this kind of insurance, this kind of hedge, goes far beyond the three parties involved.  Because Mike's new business, that's going to emply people.  It's going to produce goods and services.  Its revenue is going to be taxed, aiding the government.  So the fact that you can take out the insurance with Jimmy, which allows you to loan to Mike, is helping far more people than just the three main parties.

Without this kind of hedge, a lot of business wouldn't get done.  $20,000 might be a lot of money to you, but imagine if you're a company loaning $20 million.  You really don't want to make a bet like that without a hedge.  So you find a corporate Jimmy -- someone who'll insure that $20 million bet for $3 million.  Now, you stand to make $17 million if the loan pays off, and if it doesn't, you're only out $3 million.  So you're a lot more likely to make the loan.

And this is how virtually any big project gets done.  You have to have insurance, if you're dealing with big sums of money.  You couldn't make a $100 million movie, for example, without insuring your star.  Because if you're sinking $100 million into a movie and your star dies or exposes himself in public, you want a hedge in place so you don't lose that whole $100 million.

And this is, while simplified, what happened with mortgages.  Banks loan money to people buying and refinancing homes.  But they hedge their bets by taking out insurance on these mortgages.

Now things get a little bit tricky.  Bob comes around, and he thinks that Mike's business is a good bet.  He offers you $30,000 right now to take possession of your loan to Mike and your insurance from Jimmy.  He's betting that the odds are a lot better that Mike's going to succeed and he'll get paid $40,000.  This sounds great to you, because it guarantees you a good profit.  It lets you cash out, here and now.  So you take it, and you've made $7000 ($30,000 minus your $20,000 loan to Jimmy and the $3000 you paid for insurance from Jimmy).  Bob's happy, because he thinks Mike's going to pay him $40,000 -- a nice $10,000 profit.  And if that doesn't happen, Jimmy is at least going to pay back $20,000 of the $30,000 Bob paid to acquire Mike's loan and Jimmy's insurance on it.  Again, everyone's happy.

And this is what happens to mortgages.  They get bought and sold.  And the new owners are entitled to take out new insurance policies against default, if they're not satisfied with the hedge they have.

More commonly, a whole bunch of mortgages get bundled together and sold as a unit.  In our example, Mike's loan is a meager $20,000 -- way below the radar of big money.  The people buying these mortgages have a lot of money and don't want to bother with little $100,000 loans.  So people bundle them together and sell 50 of them at a time.

None of that's really the problem.  You not only have the right to hedge your bet, but you're smart to do so.  And you have the right to sell the loans owed to you, as well as insurance policies on those loans.  And you're smart to do so, if you get a good price.

THE SUB-PRIME CRISIS

The real problem is that there's too many rich people in the world.

Or more accurately, there's too much money.

There's trillions of dollars out there, held by very rich people and their companies, and they're looking for things to invest in.

This is idle money, just looking for things to invest in, to generate some sort of return.

And the safest -- the absolute safest -- form of return is a federal bond.

But as the economy started slowing down under Bush, the Federal Reserve made it very clear that it was going to keep interest rates close to zero.  It wanted to stimulate the economy, so it wanted to keep the rate that banks charge other banks for the overnight loans, on which they depend, close to zero.

But federal bonds are tied to the prime rate -- the rate controlled by the Federal Reserve.  So the Fed was telling people that they wouldn't make much money on federal bonds and should look elsewhere.

Which sounds good, because it caused all that idle money to look to invest in the private sector, rather than just buying those safe, low-interest government bonds.  To invest in companies that employ people.

And all this idle money looking for investments, it started noticing something:  home prices kept going up.  Year after year, prices increased radically.  Homes were doubling in value every few years.  In the worst case scenario, a home owner could always sell his house and pay off his mortgage, making everything he'd paid back, in just a few years.

Responsible people were seriously arguing that we had broken the cycle of economic ups and downs, at least when it came to real estate:  it was a new era, in which home prices in America were always going to rise.

So people started packaging mortgages together and selling them to all this idle money through investment firms.  These were good investment, with solid returns.

All those trillions of dollars in idle money couldn't get enough of these mortgages.  There was literally not enough of these bundles of mortgages to meet demand.

So banks started selling mortgages to people with poorer and poorer credit.

Mortgages were offered to people with less than good credit.  These mortgages are termed sub-prime and were charged a higher rate, in response to poorer credit.

Then mortgages were offered to people without checking their bank balances, simple taking their word.

Eventually, mortages were offered to people without even checking their income, taking their word on that too.  People just stated their occupation, and the bank had a financial expert certify that someone in that occupation could theoretically earn what the loan applicant claimed he earned.

And applicants were actually told ahead of time that their bank balances and income wouldn't be checked.  As if they were being asked to lie.

But all that idle money still didn't have enough.  Investment firms literally called banks and asked if they had any more mortgages to sell, putting a lot of pressure on those banks to create more mortgages.  Their competitors certainly were.

So banks started committing fraud.  An applicant for a mortgage would say he earned $30,000 a year but the banker would write that he earned $300,000.  Massive fraud resulted, and no one asked any questions.

In other words, banks started creating a lot of questionable mortgages.  But they did this to meet demand.

At every step of the way, people within banks raised objections.  But a bank that wouldn't lower its standards would hear about how the other banks were, and they had to compete.

The investment firms knew some of these mortgages were bad.  But they bundled them together, and they told themselves that even if some mortgages defaulted, the bundle would still perform.  And if a firm wouldn't trade in these shady mortgages, their rival firms would.  And once one firm does, everyone does.  They want to compete and can't afford to be left out.

The investment firms had computer models and analysts, who were saying that everything was fine.  A normal mortgage might have a default rate of a couple percent.  One of these sub-prime mortgages might run twice that, which wasn't bad.  And even then -- even if the models were massively conservative -- these mortgages as a whole would make money.  Even if you didn't believe the models and guessed the default rate would go to 10%, these were still good investments.

The default rate on a lot of these bundles of sub-prime mortgages is now expected to be higher than 50%.

As bad as that sounds, no one was innocent in that transaction.  People were taking out huge mortgages -- half a million dollars, say -- without almost any income.  They knew they couldn't repay it.  The bankers often knew too, and they did mislead and defraud some people.  But what they were doing was extending credit to poor people, and that doesn't sound so bad.  President George W. Bush was talking about the importance of home ownership as central to the American dream, talking up the real estate market.  And most of these sub-prime mortgages were going to people who couldn't have gotten a bank loan, just a few years before.  Which sounds like a good thing.

But the other reason to understand why people let this happen is that everyone was making money.  Because these mortgage bundles were such hot commodities, no one held on to them long enough to worry too much about their default rates, years down the line.  The ink on these mortgages was barely dry before they were packaged and sold off to all that idle money, looking for investments that promised some sort of return.

And you know how we know that the bankers believed their own hype?

Because so many of them invested in sub-prime mortgages, even though they saw the lending process from the inside.

But remember Jimmy?  The guy who we bought insurance from?  Well, he's also selling insurance on these bundles of sub-prime mortgages.  Because all this idle money buying mortgages as investments wanted to hedge their bets -- and appropriately so.

This wasn't bad faith or a sign that anyone knew these were bad investments.  This is just how business is done:  you hedge your bets, just like we did with Jimmy.  In most cases, one department at a company is acquiring these mortgage bundles, while another is acquiring the insurance on them.  Those two departments don't necessarily speak much to each other, and the department acquiring these insurance policies as hedges does so as a matter of course, on any big investment the company makes.

But few people really understood how to insure these new bundles of mortgages.  So these departments looking for insurance went to financial firms like Lehman Brothers, and these financial firms wrote up insurance contracts.  Incredibly complicated contracts that almost no one understood.  And this insurance came at very low costs, because everyone thought home prices would keep on rising, especially since everyone kept investing in mortgages.

Then, just to be safe, these departments responsible for hedging the company's bets could even go some other firm to get insurance on their insurance.  Again, this isn't because they thought their insurance company would go belly-up.  It's just good business practices.  Because when you've got $100 billion in assets insured by Lehman Brothers, for example, you want to have a hedge in place so that, on the off-chance Lehman Brothers does go bankrupt, someone else pays off.  And the departments getting this insurance are doing so as a matter of course.  They see there's $100 billion insured through Lehman Brothers, so they take out insurance with AIG against Lehman Brothers not paying off.  And this insurance is super cheap, because no one thinks Lehman Brothers is going to go bankrupt.

Which it later did.

But the logic was sound.  And all these insurance policies are what's called derivatives, because they're not the principle assets themselves -- the mortgage bundles.  They're financial instruments derived from those mortgage bundles, and they can be sold and traded just like the mortgages themselves.

The mortgage bundles themselves would later be called "toxic assets," once people realized what poor investments they were.  By then, companies were opening their books and revealing billions of dollars that would never be repaid -- enough to make company after company insolvent.

And everyone has these toxic assets and derivatives based on them.  They're traded and traded until everybody's got them.

WHAT WENT WRONG?

Despite every step in this process being logical, this shouldn't have happened.

Some reasons are pretty obvious.  We can blame Bush for talking up home ownership, but he didn't create the problem -- he just encouraged it and failed to stop it.

On that note, there are a lot of laws on the books encouraging home ownership, like tax breaks for first-time home buyers and preventing the loss of one's primary residence during personal bankruptcy procedings.  These have the effect of subsidizing the real estate market.  But few people are against these laws, because we like the idea of giving the average American family just a little help in buying and keeping a home.

One obvious culprit is the banks, who made these questionable mortgages.  But here we have to distinguish between sub-prime mortgages and outright fraud.

Because there's nothing wrong with a bank extending mortgages to poor people without perfect credit.  Banks do this at a higher interest rate, because more of these people are going to default, but at least those people can buy homes for their families.  A lot of Americans fall into this category, but they are themselves the same sub-prime borrowers that they themselves are now railing against.

The fraud is another story.  But you can understand why a banker might have committed fraud, such as misleading someone into an adjustable mortgage rate or lying about how much income that borrower claims to make.  On the plus side, this fraud helped set people up with homes -- homes they couldn't have purchased otherwise.  So it's easy to rationalize.  But the deeper reason for this fraud involves market forces.  Bankers make commissions on their mortgages, so there's personal incentive to lie, especially when everyone who is a good credit risk has long already purchased a home and the banker's livelihood is at stake.  But there are also all those financial firms, calling up the bank, asking for more mortgages to bundle and not caring too much whether they're going to default, since they really exist to be traded to other investment firms.  And in response to this overwhelming demand, bankers had to create more and more supply.  At a certain point, doing that was going to inevitably involve fraud.

This doesn't excuse the fraud that existed.  But it's worth understanding it, because it wasn't the result of evil people out to make money while ruining the economy.  Remember, these bankers themselves invested in the same kind of sub-prime mortgages they were making.  This fraud had a lot more to do with unregulated market forces.

Because it's the government's role to find and prosecute this fraud.  The market isn't going to regulate itself.  But that kind of oversight, well, it wasn't exactly popular, when things were going well.

In fact, everyone was advocating for less regulation.

And this applies to the whole business of trading mortgages too.  Commercial banks, the kind insured by the federal government, didn't used to make these kinds of trades.  Investment firms did, and those investments weren't insured.

At a commercial bank, people deposit their money and have a bank account, and the bank makes investments that allow it to pay people back.  The federal government insures those banks, up to $200,000 per account, so people don't lose their money and their confidence in the banking system, like they did during the Great Depression.  Back then, if the bank went bust, your money was just lost.  So if times looked tough, everyone ran to the bank to get their money out.  This caused what's called a "run on the bank," where all the bank's debts come due simultaneously, and it can't repay.  And it caused a chain reaction of bank failures during the Depression.  So the federal government insures those banks, making the whole system safer.  In exchange, those banks are limited in the kind of investments they can make, because you don't want to be federally insuring banks that are making risky types of investments.

Investment firms, on the other hand, didn't have their hands tied.  And in return, they didn't get insurance through the federal government.

But in the boom times of the housing market, it looked to a lot of people like this was just an old-fashioned, ridiculous government intrusion on the free market.  A lot of people, especially free-market economists, thought it made sense to loosen these regulations.  No less than Alan Greenspan pushed for exactly this.  After all, home prices kept going up.  Everyone was trading these bundles of mortgages and making big bucks, but these insured banks were left with the boring old investments.  Like stocks and those same government bonds with the low interest rates that helped turn all those trillions of dollars of idle money to mortgage bundles to begin with.

So Congress deregulated the kind of investments commercial banks could own, which helped spread the problem into parts of the financial system that shouldn't have been infected.

It's easy to see, in retrospect, that these mortgage bundles and their derivatives were in fact exactly the kind of risky investment that the law was designed to keep commercial banks from engaging in.

But another problem was that it wasn't easy to tell just what bad investments these mortgages bundles were.  That's because the agency that assesses credit risk wasn't built to assess huge bundles of sub-prime mortgages.  It's pretty good at assessing companies' credit risk or the risk of an individual mortgage.  And you hear all the time about some company's credit receiving a lower rating, causing its stock to slip dramatically.  But it was shockingly easy to mix sub-prime mortgages together and get a higher rating for the overall bundle.  Take a lot of toxic assets, mix them with some good mortgages, and you can pretty easily get that prized triple-A rating.

In all these cases, capitalism itself wasn't the problem.  Trading mortgages or derivatives created from them wasn't the problem.  Unregulated capitalism, however, was the problem.  The sub-prime crisis was the free market run amok.  And all of the solutions involve added regulation.

For example, re-regulating the kind of investments insured banks can engage in.

Or strengthening the credit rating agency, creating the kind of independent and reliable organization that should have caught the fact that these mortgage bundles were really, really bad investments.

Or strengthening the oversight on banks so that, while they can choose to engage in sub-prime lending, they're likely to get caught and face stiff penalties when they defraud borrowers and lie on mortgage applications.  Which makes it really hard to evaluate their credit rating.

These are pretty concrete solutions -- ones that don't involve rejecting capitalism.  But they do involve rejecting the kind of unregulated, free-market capitalism that most Republicans champion.  But they're certainly not socialism.  In fact, they're tools to aid and strengthen capitalism, ensuring that the power of the free market isn't abused like it was during this crisis.

SYSTEMIC RISK

Of course, the housing market crashed, and everyone was caught holding all these dubious mortgages and derivatives created from them.  Banks had so many billions of dollars worth of these assets that they didn't know how much they had.  And it was hard telling which mortgage bundles were good -- the kind that might have been made before the sub-prime explosion -- and which were toxic assets.  And there was a huge gray space between the two, with very little ability to asses the invidual mortgages making up these bundles.

This meant banks and investment firms suddenly owed billions they couldn't repay.  Even rumors of this kind of situation can cause a crisis of faith in that bank's credit.  Banks daily loan each other huge amounts, which is what the Federal Reserve's prime rate most directly affects.  If a people lose faith in a bank's credit, they can stop these loans and call in their past loans, crashing a bank within days.  No bank has enough cash reserves to survive.

It's easy to say "So what?"  It's hard to care about banks.  And we're all taught that capitalism means letting unsuccessful businesses fail.  Even if a lot of banks fail, that's just the free market, and it'll teach the surviving banks a lesson in being more conservative in their investments and not letting this happen again.  And not letting them fail teaches exactly the wrong lesson:  that you should make risky, irresponsible investments, because the government's always there to bail you out.

All of which is true.

The only problem is what's called "systemic risk."  Or put another way, that many banks were "too big to fail."

In other words, financial institutions are intricately inter-connected.  Each institution has massive levels of debt, payable to others.  If one goes down, all the others are affected.  And the bigger the bank, the deeper the effect on the others.

And this isn't simply because bigger banks have more loans.  It's also because of all those routine insurance policies, those derivatives, that companies routinely take out.  They guarantee that these huge banks will repay their investments and were sold really cheap, since no one thought these banks could fail.  If the bank fails after all, all these cheap policies now represent huge liabilities, and the banks that offered them now face huge payouts that will bankrupt them, in turn.

So there's a domino effect, in which one bank failure ripples through the other banks, causing others to fail.  And every time another fails, there's another ripple.  And if these ripples are massive enough, as they were with the sub-prime crisis, all the big banks and investment firms could fail.  Which means -- boom! -- instant depression.

Consider the case of Lehman Brothers, which went bankrupt in September 2008.

By then, everyone knew there was a sub-prime mortgage crisis.  Lehman had been holding massive amounts of these sub-prime mortgage bundles.  In early September, rumors circulated that Lehman was insolvent.  The false rumor that one bank had refused Lehman one of those daily loans was enough to get everyone else to stop loaning to Lehman.  After all, people were panicked and didn't want to loan to a firm that wasn't going to be around.  Within days, Lehman ate through its cash reserves and knew it wouldn't survive without a bailout or a buyer.

The Federal Reserve, which had previously bailed out Bear Sterns, was worried that Wall Street would get the message that anyone insolvent would get bailed out.  It felt what a lot of people now feel:  that capitalism involves risk, and bailing out rich bankers defeats the purpose -- or at least sends the wrong message.  The Federal Reserve also figured that someone would buy Lehman, but it announced that it would not bailout Lehman, regardless.

Lehman couldn't find a buyer.  Potential buyers went through the company's books and saw too many toxic assets.  So on 15 September, less than a week from the start of those rumors, Lehman announced plans to file for bankruptcy.

And the result rippled through the economy.  Lehman employees lost their jobs.  The day Lehman announced its bankruptcy, the Dow Jones dropped 500 points.  If it had happened to Lehman Brothers in a week, it could happen to almost anybody -- which made Wall Street even more skittish about new investments.  All the banks were holding onto their money now, because they would need every bit of cash reserves if they ever faced a similar credit crisis.

But worst results were unanticipated.  Not long after Lehman's collapse, AIG faced a similar crisis.  And it turned out that one division of AIG had written a massive amount of insurance policies on assets owned by Lehman Brothers.  In writing those policies, AIG had figured that Lehman Brothers would never collapse, so it was getting money for nothing.  Now, Lehman Brothers had collapsed, and AIG owed billions.  And AIG wasn't alone.

THE BAILOUTS

It was around then that the federal government took the lesson.  It didn't want to bailout bankers who had made mistakes.  But the alternative was to allow these ripple effects.

When the first federal bailout was proposed to Congress, Senators were told that we were facing an immenent total collapse of the entire global economy within days.  A new Great Depression.  Banks would go under.  The survivors would stop loaning.  And when credit freezes, it's not just other banks that go down.  Small businesses can't get loans.  Farmers can't get the annual loans to bring food to market.  The majority of businesses depend on credit, so many go bankrupt, and there's massive job loss across the nation.  We're not talking 10% unemployment.  We're talking bread lines and tent cities.

And to make matters worse, all the commercial banks are ensured through the federal government.  So when they go down, every investment (up to $200,000 per investor) has to be repaid by the U.S. treasury.  Which is why you know your money's safe when you put it in a bank -- it's guaranteed by the federal government.

Then there's the cost of unemployment and the added services associated with it.  The economy slows as people don't have the money to buy from the businesses still remaining.  Tax revenue drops through the floor.

So between added costs associated with economic collapse and lost tax revenue, the federal government ends up losing out on vast sums of money anyway, equivalent to a bailout, only it gets no bailout for it, only a ruined economy and untold human suffering.

Congress first failed to pass the bailout, following protests from constituents and talking heads who were angry and didn't understand the situation.  But it voted again and got the bailout passed.  Then Obama came into office, and we got a second bailout.

One of the things that has irritated people about the bailout are firms that have received federal money behaving in ways that seem irresponsible.  The news has been filled with stories of such firms giving gigantic corporate bonuses and severance packages.  In almost all cases, these were required by contracts established prior to the crisis, so the firms are required by law to make them.

But Wall Street has gone further, saying that high corporate salaries and bonuses are required to secure the best talent.  Fair or not, executives have gotten used to this kind of money.  Of course, it's infuriating.  And Obama's not only condemned this but taken severe steps to cap salaries and bonuses at firms receiving federal money.

In the long run, executive salaries are certainly too high -- far too many times higher than their employees.  And executives don't have any corresponding education to justify those salaries.  This is one reason why too many of the best and brightest American students go into business and end up selling derivatives, rather than creating and producing.  This is something that needs to be corrected, and it's a long-term problem for the U.S.  But it's not clear how the government could limit salaries at private companies that aren't receiving federal dollars.

Another thing that has irritated people is that there's little oversight over how banks have spent federal dollars.  In the early days of the bailout, the Federal Reserve was desperate to prevent another Great Depression and was worried that a lot of firms would refuse federal dollars because they didn't want any federal oversight.  Banks often didn't even know how much they had in toxic assets, and they were paranoid about others finding out and causing the kind of lack of confidence in those banks that had caused Lehman's collapse.  So the Federal Reserve didn't want to monitor where the bailout was going.  Because if it did, firms might decline federal intervention and collapse, ruining the global economy.

But it's easy to understand why, with little oversight as to where the money's going, it looks like everything done by any company receiving tax dollars is doing it on the people's dime.  So if a firm throws a Christmas party, it looks like it's paid for by the federal government.

Yet another thing that has irritated people is that the banks receiving federal dollars haven't started loaning them out, especially to average people.  And if you're contemplating buying a house for your family, it's understandable that you're upset that the firm that might decline to give you a mortgage got a bailout.

But from the banks' perspective, it's got to hold on to this cash.  That's because it has massive amounts of toxic assets on its balance sheets:  in many cases, literally billions of dollars on the page that are really worth millions.  And if they admit that those assets are worth millions and not billions, suddenly they're massively in the red.  And insolvent.  And bankrupt.  And they close.  And these bad investments aren't paying off, meaning there's not as much cash on hand to pay other investors -- people like you and me, with money in the bank, along with building loans and everything else.  So a few billion from the federal government gives these banks cash reserves, which will help them survive the devaluation of these toxic assets, so they've got to hold on to them.

If this sounds abstract, think of it this way:  our bailout money wasn't to give these banks money to keep making loans.  It was just to keep those banks afloat and prevent the kind of crisis of confidence in them that would cause a Lehman-like collapse.  And to make sure they have the money to hand us, when we make withdrawls from our accounts.  Not to mention that, if the bank did collapse, the federal government would sometimes have to repay investors' accounts, because they're insured.

Still, Obama's heard people and is making a lot of noise about getting banks to start making loans again.  He's not doing this because it's sound policy for those banks.  He's doing this because those loans would stimulate the economy, provide jobs, and get families homes.  Economically, it's a calculated risk.  Politically, it's a no-brainer.

Then there's the complaint that the bailouts have massively increased the national debt, which is undeniable.  This debt is going to be passed on to our children, and it threatens the long-term security of the United States.  An awful lot of it is owned by foreign nationals like China, which gives those debtors power over the U.S.

This is a real problem.  But now's not the time to worry about it.  Because in a Great Depression, the U.S. isn't going to make any debt payments.  The time to worry about debt is when times are good.

Under Clinton, when the federal government ran surpluses year after year, projections showed that the national debt could be paid off within a decade.  Doing so would involve penalties for early repayment, written into those loans.  And it's hard to score political points by paying off debt, rather than spending it on pork for your state or district.  And it's a symptom of good times that you think they'll go on forever, that there's no need to worry about debt and bad times to come.  But in retrospect, this was when we should have paid off the debt.  Or loan the surplus money out to other nations, accumulating interest and avoiding our own early repayment penalties.  Or put it into an account for the economic downturns to come, like paying for these bailouts.

We didn't do that.  We should've, but we didn't.  Next time we run surpluses, we need to.

But now we're facing economic collapse, and that's not the time to worry about debt.  That's when you spend, spend, spend, to stimulate the economy.  Because if you let it collapse, you're not going to be in any position to pay off your existing debt.  Every dollar that lessens the blow doesn't just improve the economy now, but ripples through the economy for years to come -- creating more tax revenue that can pay down debts later.

And it's worth pointing out that the national debt has been with us for a long time.  It stayed at manageable levels until Reagan, when it shot through the roof.  Its increase lessened under Clinton, then shot through the roof again under George W. Bush.  Now, it's shooting through the roof again under Obama, but this time for a very good reason.  Because economically, it's better to accumulate debt to stimulate a collapsing economy than for experimental wars that, however justified, create more terrorists than they kill.  And you can't condemn Obama's accumulation of national debt and not condemn both Ronald Reagan and George W. Bush even more strongly.

Inflation is another public gripe.  And it's true that the government is printing money to pay for these bailouts.  But inflation isn't through the roof.  And, like the national debt, now isn't the time to worry about inflation.  A little inflation isn't a bad price to pay to avoid a Great Depression.

People are also angry because the economy is still so terrible that the bailouts don't seem to have worked.

And it's hard not to be angry, when unemployment's over 10%.  Almost everyone knows someone who's lost his job and can't find another, and it's hard.  It's hard on families.  It's hard psychologically.  It's hard on every imaginable level -- and ones you can't imagine until it happens to you.

But the bailout wasn't to fix the economy.  It was to prevent another Great Depression.

We will never know for certain how many jobs the bailouts have created.  The Obama administration has created an online job tracker, where you can zoom in on an area and see dots representing saved and created jobs.  There were errors, which have been much-publicized.  But you can clearly see how jobs have been saved.  And there are a lot of saved jobs that don't appear there:  companies report their own statistics, some are more conservative than others, and positions that would have been terminated at a later date haven't yet been counted.  Then there are the ripple effects:  the people with these saved jobs spend money, helping other companies and saving jobs there.  And companies hire contractors who don't report to the government because they didn't get federal dollars directly.

So there's no doubt that, as bad as things are now, they'd be worse without the bailouts.  Not to mention that the bailouts might have avoided an utter collapse in banking and another Great Depression.

And believe it or not, the economy is rebounding.  Stocks are not only up, but have already made up most of their losses.  Stocks are a leading indicator, meaning that they reflect where the economy will be, not where it is.  That's because, with stocks, people are betting the company will do better in the future -- that the stock will go up.

Unemployment is what's called a lagging indicator.  Meaning that, even as the economy recovers, it takes six to twelve months for unemployment to catch up.  Hiring people represents a big commitment, and even as businesses are doing well again, they're still a little reluctant to hire.

It's true that unemployment seems to be lagging worse than in past recoveries, but there's every indication that it's going to recover, although a bit more sluggishly than we'd hope.

But there's one last objection to be covered, and that's the ideological one.  The idea that bailouts represent governmental intervention in the economy, which goes against the principles of capitalism.  Downturns are part of a normal market cycle, and we might be better off letting them happen, letting businesses die, trimming the fat, lest the next downturn be that much more dramatic.

The first part of this objection is the easiest to address.  Capitalism was never supposed to be an unbridled free market.  Adam Smith, hero to some many capitalists, believed in governmental intervention to help the poor, lest capitalism deteriorate unjustly into haves and have-nots.  Most of our founding fathers proposed socialized programs, many of which would horrify the Republicans praising those great men.

Competition is a powerful force, and capitalism is wonderful at harnessing greed and self-interest into industry, into invention, into new technologies and better services.

But this doesn't work when one business gets so big that it develops a monopoly.  It doesn't work when businesses fix prices, to avoid competition.  It doesn't work when workers owe more and more money, without any hope of escaping poverty.  And no one wants the government to stop inspecting meat or legal drugs, nor stop maintaining an army or roads or public schools or trash pick-up.

Capitalism only works when the government steps in, to keep those powerful forces of competition on the tracks.

So there's no arguing that the government doesn't have a role in maintaining the economy.

The deeper problem concerns the future.

It is possible that blunting this particular downturn will keep waste and bad habits in the economy that will make the next downturn come earlier or hit harder.

We're already seeing signs of this, as some investment bankers are repackaging sub-prime mortgages into bundles with good, triple-A-rated mortgages and marketing them.

And we have not yet addressed several underlying problems, creating the regulation that will prevent this situation from recurring.  Such as breaking up companies that are too large to fail and preventing such systemic risk.

And credit card companies haven't exactly stopped making offers.

If you look at all the debt owned by American individuals and corporations, it's just reached the level of the entire Gross Domestic Product of the United States.

The last time this happened was just before the Great Depression.

The Great Depression sorted things out.  It reset individual debt.  Whole sectors of the economy that were inefficient or outdated went under, while new inventions and services and business models sprung up.  It was, for all its suffering, a time of profound innovation.

But who wants to make that call?

Who wants to be the one to say, "Yes, we're going to have shanty towns and food shortages and hobos jumping trains and a decade of 25% unemployment.  But trust me, it'll be best in the long run."

Who wants to push that button?  Who wants to take responsbility for that?

The Bush administration didn't.  For as much as it was filled with free-market ideologues, when it looked at Lehman Brothers and the consequences of systemic risk, even hardened free-market capitalists reluctantly embraced the bailout.  Alan Greenspan has told Congress that he was wrong, in several of his past statements and policies encouraging deregulation.

After all, you can't complain about how the economy's not recoving enough from the bailouts and also complain that we should take our hands off the economy and welcome a Great Depression.

Because, despite all our disagreements, nobody wants that.  We would do anything to prevent our children having to go through that.  The most hardened economic minds, looking at the data, forsook their ideology and endorsed the bailout.

Because, however short-term the bailout is in failing to address the underlying economic problems, no one's prepared for another Great Depression.

ACKNOWLEDGEMENTS

I am not an economist.  I am just an American who pays attention to the news.

I have tried to boil down complex economic ideas into language everyone can understand.  I appologize for any simplifications or outright mistakes I have made, despite the best of my abilities, and welcome any corrections.

For those interested in learning more about the economy and this crisis, in accessible ways, I heartily recommend Frontline's "Behind the Bailout" (one hour) and NPR's Planet Money podcast, available for free on iTunes.  The Planet Money crew have also done some features for NPR's This American Life, including the hour-long "Return to the Giant Pool of Money," which I heartily recommend.

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