When the financial world was turned upside down last fall, there was gnashing of teeth aplenty at what seemed to be the Bush Administration’s bailout after bailout of wayward banks.
One side of the aisle complained that the government had no business tampering with free markets and the other complained that why should public money be used to save hubristic and overpaid corporate executives.
As the Bush years faded into the Obama ones, lots of people conveniently forgot upon whose watch this fell. For instance, I interviewed U.S. Rep. Eric Cantor a few weeks ago and he was complaining that “we have to get the government out of the capital markets.” I pointed out that George Bush and Treasury Secretary Henry Paulson, both Republicans like Cantor, were the ones that inserted the feds into finance. He was silent for a full 15 seconds protesting that it was seen as a catastrophe. I guess Eric typically gets a free and unchallenged ride from the Virginia media.
Anyway, on to my point. The news today is that 10 big bailout banks — J.P. Morgan Chase & Co., Goldman Sachs Group, Morgan Stanley, BB&T, U.S. Bancorp, American Express, Capital One, Bank of New York Mellon, Northern Trust and State Street — all want to start paying back their billions in bailout funds.
Good news, to be sure. It shows that a recovery might actually be in the offing. And it shows that the banks want federal government restrictions brought on by the bailouts, gone.
The news points out another thing. It is fairly common in financial crisis to have a government bail stuff out and it can be only temporary. A couple case points:
- Chrysler was slammed by shoddy cars and bad decisions in the 1970s. It got federal loan guarantees worth $1.5 billion in 1979. New management saved the day and the firm paid everything back by 1983.
- Long Term Capital Management, a big hedge fund, went bust in 1998, threatening plenty of investors. It came as much of the rest of the world, Thailand, Taiwan, Singapore, Japan, Russia, and Mexico were going through or had gone through bad times. The Ne York Fed arranged more than $3.6 billion in loans which were paid back by 2000.
There are other example,s but you get the point. It is actually a tried ands trusted practice for the government to come in with bailouts and sometimes it works. If this sounds like I’m saying something positive about George W. Bush it may well be.
I am not addressing, however, the massive bailouts of American International Group, one of those “too big to fail” firms. What has happened is shameless and I wish grand juries and Congressional probes on the perps. And, there is a legitimate question out if these types of bailouts tend to perpetuate a flawed financial system that got us into trouble in the first place.
But I stand by my point -sometimes bailouts are good things and can work.
Peter Galuszka
