Finance

'The Big Money' On The Bailout That Wasn't

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There's something about saying "No more bailouts" that appeals to the [l]ibertarian in everyone. Let Fannie Mae and Freddie Mac shrivel. What's Lehman Brothers got to do with me?

The trouble with this particular string of trouble is that it's impossible to know how much harm a failing Lehman Brothers, to name the latest belly-upper, would do to the global economy. Lehman Brothers insured loans for other banks, and now those other banks are running through their books trying to figure out whether they're still in business.

From our friends down the street at Slate comes the Big Money, a new site with the good sense to launch today, of all days. Chadwick Matlin and James Ledbetter kick things off with a tough message for bailout haters. They argue that the government should have saved Lehman. From Matlin and Ledbetter:

It is not unreasonable to think that tens of billions of dollars of capital will be wiped out across the globe on Monday as a result of Lehman's collapse; it is, after all, the first large Wall Street firm to go bankrupt in nearly two decades.

By helping Fannie, Freddie and — earlier — Bear Stearns, the government made a string of decisions to protect the economy from shock. By sitting this one out, say Matlin and Ledbetter, officials forced a major Wall Street firm into bankruptcy. The Big Money sums it up like this:

In short, Wall Street is entering into a brave new world in which the Federal Reserve, the Treasury, and even the Securities and Exchange Commission are vital players.

Which is kind of weird, when you think about it.

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I just don't see how it makes sense to bail them out. People think that a "bailout" is a good thing, for some reason.
Bailouts create moral hazard thus encouraging more stupid risk, and they pass the burden for losses of a company on to the taxpayer. I realize that intrinsically, we all pay the cost of a company like Lehman failing, but I don't see how compounding that loss makes any sense.
The problem is that the creation of Fannie and Freddie as govt sponsored entities directly led to the current credit crisis. Fannie/Freddie's incompetent management took too many risks, since they knew the govt had their back in the case of a loss. The government needs to stay out of business!

Sent by Jeff | 11:54 AM | 9-15-2008

Suggesting Uncle Sugar should indeed bail out Lehman Bros after doing so for Bear Stearns and Fannie and Freddie is like saying "yes, two wrongs do indeed make a right."

Sent by Barry Fisher | 12:06 PM | 9-15-2008

@Jeff: I can see your point about government backing leading to foolish risks. My question is whether you personally would support limiting the damage to the economy.

In the case of Fannie and Freddie, every economist I read said the choice was to bail them or to face a global economic implosion. Are you saying you don't believe that's so, or are you saying an implosion is okay?

Sent by Laura Conaway, Planet Money | 12:07 PM | 9-15-2008

I'm saying that they shouldn't have been created in the first place, and their creation was primarily responsible for the situation we have now. The situation finally reached a predictable end with Fannie/Freddie becoming a govt entity, rather than a govt sponsored entity. I'm not sure how long it will take, but I would hope that people will eventually learn that economics is for real. People will always act in the way they perceive to be their short term best interest.

Freddie/Fannie were created to "help" people get homes, but ultimately this lead to what we have today. They say the path to hell is paved with good intentions and I think in this case that is spot on.

I'm curious about what you believe would actually be considered an implosion? The taxpayers taking on a burden of 5 trillion dollars worth of debt, and 3 of the 5 largest investment firms in the world have failed, and yet you say there has not been an implosion?

It made me sick to listen to CNBC last night praising Bernanke, Paulson, et al. These morons have been asleep at the wheel for the last 6 years and no one has done anything until the very last minute. Many people believed up to 5 years ago that the credit rating agencies were skimping on their responsibilities and not accurately reporting the risk of these mortgage backed securities. Cramer even said something over a year ago and still nothing was done.

Spare me this talk of whether an implosion is okay or not. The implosion has happened and it's largely because our govt has not been paying attention and doing the job we pay them to do.

And apparently their only solution is to give them more responsibilities? I wish someone would explain to me how this makes sense.

Oh, and I'm adding you on Twitter...haha.

Sent by Jeff | 3:29 PM | 9-15-2008

There nothing wrong with our economy. It's just Liberals making up stories. John McCain said so. So did Sarah Palin,a dn she knows a lot about the economy being a governor. Regulation is wrong too. Dick Cheney says it lead to job losses. It's un-American too.

Sent by Homer Huntwater | 11:03 PM | 9-15-2008

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