Alternative Future: What Would Have Happened Without The Wall Street Bailouts?

Bruce starts with Gary Johnson's candidacy, and then starts wondering about what would have happened in 2008 had we not bailed out the Big Boys on Wall Street:

Hi Marc,

Got a kick out of ur assessments.

Totally agree with U about those southern evangelist-pollyticians, no thank you!

[Maintenance guy] just put a light fixture in my closet that went out. He's always talking about pros of legalizing maryjane, so I told him his man Johnson is running.

[Maintenance guy] told me he actually did some work on Gary Johnson's house, which is located in some subdivision on side of Sandias before U get to La Luz trail. He put in a faucet for Johnson before he returned from his Mt. Everest climb.

Always wondered who had the $ for some of those Sandia Mtn homes. Apparently Johnson made his $ in contruction with his own company, Big J, that he sold before becoming governor.

Hey, I just learned what 4-20 means a couple of days ago. Yeah, that would have been interesting if Johnson declared on 20th.

Thanks God the Repubs don't have anybody close to beating Obama.

What do U think would have happened if our govt. had not bailed out such fine outstanding companies (money grubbers) like Goldman & Sachs, JP Morgan and AIG???
Would we really have gone under? And if we had, would it be any worse than what we have now with more than 14 million unemployed and the same damn companies paying million-dollar bonuses??? (Those CEOs gotta be laughing at us all the way to the bank.)

Same psychic who predicted last year that there would be giant quake in Japan in 2011, is predicing Wall Street crash in 2017 - bigger than the one for Great Depression. 2017 is just 6 years away and if they continue with their unethical trading practices and very little govt. regulation or oversight, I certainly can see Wall Street hitting the skids again. No surprise there.

Anyway, I didn't mind us bailing out GM coz there were too many spin-off industries that would have been affected, but I'm not so sure about AIG, JP Morgan and Sachs.
Let 'em crumble baby.

Your thoughts?

Take care.

Bruce

I reply:

It’s really hard to say what would have happened had not the federal government intervened to bail out the Big Boys on Wall Street. In 2008, they were saying that they had to intervene to save AIG, no matter what, because AIG effectively underwrote almost every contract signed by almost every government (state, federal, local, municipal, tribal, etc.) in the United States for the last twenty years. Allowing AIG to go bankrupt would have completely disrupted the entire U.S. economy, at every level, even in solvent areas that had nothing to do with housing. No matter what you thought about AIG, you had to save it. You can see why Bush/Obama felt they had no choice but to act.

The trouble, of course, is that you create huge moral hazard by saving the kamikazes who ruined the economy. Those kamikazes are still around, they made out OK in the end, and they are eager to try it again.

One trouble is that it isn’t clear what part of the economy can sustain a great boom. Real estate is a perennial favorite for booms, but with moves to put Freddie Mac and Fannie Mae out-of-business, real estate is likely to go into a long, long, long eclipse.

Technology can be a panacea at times. In the 1930’s, there were some sexy new areas, like radio, that looked promising. In the 1990’s, the Internet was maturing, and so there was room for a boom there, but it’s important to remember that the Internet was a fruit of defense spending in the 60’s and 70’s. We’ve sort-of stopped investing in scientific advances, and so there’s little to fill the vacuum. Since the 80’s, there has been a lot of talk-talk about genetic advances and biotechnology, but most investors and researchers actually spent the last several decades creating profitable but sterile patent roadblocks to scientific advancements. It’s not even a matter of regulation either. There’s money enough, but everyone wants to get paid first. (First. Paid. Now. Do you understand? We might work, for money. Lots of money.) So, with the exception of lithium-based depression drugs, there has been almost no real drug development in the United States since the 60’s. We use almost the same medicine chest today they used then. Too bad! What a waste of talent and energy!

So, the smart money lately has into commodities, but as soon as commodity prices rise they throttle the rest of the economy, so it’s self-defeating (as we are seeing now with gasoline prices): not enough for a really-big boom. Stocks have risen, but not enough, and they may be plateauing now.

If we hadn’t saved the Wall Street Big Boys we probably would have had an extremely-sharp depression: much worse than 1929, since many, many more Americans own stock today than then. Say, unemployment rate peaking at 40%. On the other hand, once Goldman Sachs, CitiGroup and the rest had been vaporized and removed, we probably would have bounced back fast. We’d probably already be back at 5% unemployment. Instead, we are probably in for a Japanese-like period of stagnation that might last decades, with an unemployment rate stuck at 10%. So, there was a price to be paid for not unduly disrupting the rest of the U.S. economy.

I thought it was real interesting to watch Congress in 2008. They can nickel-and-dime the National Endowment for the Arts for months, practically to death, for a few, measly million dollars, but when really serious money is at stakes they react with lightning speed. They signed off on TARP, with potential expenses near a trillion dollars (fortunately not realized) in less than a week. When Big Money – Real Money - is at stake, Congress’ reflexes are better than an Olympic gymnast’s in the championship round!