I get it. People are angry about the bailout. They hate the fact that the government used taxpayer money to pay off a bunch of rich, Wall Street fat cats while Main Street suffered. There's a lot of anger because now there's 10% unemployment, Wall Street execs are still getting big bonuses, foreclosures are still rising, etc. There is so much pain out there and believe me when I say I'm also in pain it. Everyone in this economy has been affected.
But I am glad the government spent a trillion or so dollars bailing everyone out.
The main question is: what would've happened if we didn't do the bailout?
- All of the banks would have gone bankrupt. Forget about fault for a second (was it the change in mark to market accounting rules in November, 2007, was it the aggressive subprime mortgage lending, was it the shortsellers, was it the run on the banks, who knows?) Morgan Stanley would've definitely gone bankrupt. Then Wachovia. Then Citigroup. Then Goldman Sachs, Bank of America, etc.
Would this have been a good thing? A bad thing? Very bad. Read on.
- Many major Fortune 100 companies would've gone bankrupt or had to scale back all of their operations drastically. General Electric would've gone bankrupt or would've had to scale back most of their businesses. They would've had zero access to the commercial paper and short-term financing that they had used to finance their business on a daily basis for decades.
- Most small businesses of 20-1,000 employees would've gone bankrupt. I ran a small business in the 90s. Because we were growing, we were often hiring employees to do new jobs for new clients well before those clients paid us. This is normal. Big companies typically pay in up to 20-60 days. But before they pay, I had to complete work for them. Which meant, because I was growing fast, that I had to hire employees. Banks then would offer short-term financing based on my contracts with companies so that I could then hire the new employees. Well, no short-term financing (because my bank, Citigroup, would've gone out of business) means no new employees, means I would've had to fire most of my then current employees (given we were still in business in 2008) and effectively I would've been out of business. Most small businesses are like this and use short-term financing to make payroll.
- Millions of people would've lost their insurance. Companies like AIG would've gone out of business and millions of people would've been without adequate healthcare coverage. Not to mention life insurance, property insurance, etc that would've been lost. Obligations that would never have been paid or would've taken years to settle in bankruptcy courts.
- Unemployment probably would've instantly gone to 20-25% or much higher.
- If the above situations occurred, what would've been the chance for violence and civil unrest? Probably quite high.
- We don't know how the stock market would've behaved. My guess is the S&P 500 would've gone below 400 (as it stands, it went as low as 666). What we do know is that the market has now rallied up over 50% from the lows. Although, with the financial system mostly stabilized we are still a good 200 points lower on the S&P 500 than where we were the day before Lehman collapsed.
This article is not about solutions or causes or about how we could've reacted even better than we did. The article came about because a well-known TV host "tea-bagger" was screaming at me in a phone conversation about how "his America" has changed forever because of this bailout. Well, it's my America as well and I'm thankful we didn't plunge into the chaos that almost certainly would've caused so much pain that America as we know it would've been irreparably damaged.