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Do I understand the bailout correctly?

The government tells us that some banks are bankrupt. To me, this means that they do not have the money people deposited, and not everyone would be able to get their money. The government then poses a solution in the form of using our tax dollars and printing money to replenish our lost money in the banks. Then, with fractional banking laws, the banks can loan out 90% of that money, thus creating a situation where they don't have the money to give to everyone again.

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1% capitalization

I read somewhere that some of the banks that got the bailout only need to have 1% now, I think the quote was from Peter Schiff.

Talk about being under capitalized. Would you invest in a company that was leveraged 99 to 1? The Government thinks its a good investment. Must be nice playing with other peoples money.


sounds correct

except i was under the impression they could "only" lend out 7x their portfolio. but, maybe it is 90%.

also the banks that are bankrupt are generally not the depositor banks. they were the investment banks and companies that tried to insure those banks.

but in the broad sense of things, what you said is basically true. =)

What you're describing is

What you're describing is just the normal workings of the Federal Reserve as lender of last resort, pre bailout. The theory being that all depositors of the bank will not, at the same time, demand more than 10% of their deposits withdrawn, and in the rare cases that they do, the Fed will step in and lend the specific bank the required funds, secure in the knowledge it will get the money back as the loans the bank made are paid back over time.

Now, if the bank made bad loans, so that it did not get paid enough to pay back what the Fed fronted the depositors, the FDIC would make up for the shortfall on accounts up to $100,000, and the depositor would eat the rest. But, in order for the FDIC to take over this obligation, it would dissolve or reorganize the offending bank, leaving nothing to shareholders, and only what was left after depositors got paid to bank bondholders. So, the bank itself, it's owners, and those that lent it money, would be severely impacted. Just like the owners of and lenders to any other company that makes decisions that turn out to be economically unsound.

The bailouts were put in place to avoid FDIC resolution of a lot of banks , hence keeping them and their owners and lenders from taking losses. The most egregious example perhaps being how $12 billion of AIG's bailout money went to pay off debts it owed Goldman Sachs, so Goldman did not have to take a loss.

A point to remember is that, even absent bailouts, banks would have taken enough losses to have cost the taxpayer, via FDIC backstops, lots of money. And, in theory, assuming the bailed out banks does largely recover to the point of paying back their bailout funds, and gets regulated to the point where they no longer make the kind of decisions that led to this "crisis"; the total, as accounted for, cost of the bailout could turn out to have been less than letting the FDIC do its thing. The end result would, in either scenario, be taxpayers out a good amount of money, and a smaller and less risk seeking banking system.

And that's probably as far as most "macro" economists will ever bother to look, as that is the "aggregate" level all their equations begin and end with. But, if you look a bit deeper, the smaller banking system that would have been the result of no bailouts, will be one where those that made wrong decisions are largely replaced, as they would have lost the money that enable them to own large chucks of banks in the first place. Instead, more prudent people would have been given an opportunity to expand into markets vacated by those bankrupted incompetents. With bailouts, a banking system that may well look similar on the outside, will differ in that it still contains all the incompetents. The incompetents may, in theory, be regulated to the point where they are no longer able to threaten the "system" by their incompetence, but they will still own the better part of America. While those more competent, will be left with nothing but the tax bill to show for their prudence and competence in banking matters. And, pretty much by definition, over time a banking system ran by and for incompetents will underperform one ran by competents, hurting the American economy.

So, even given bailout proponents every benefit of the doubt, and assuming macro accounting shows the bailouts get paid back to the point where they were "cost free", they still represent a huge wealth transfer from those who did not make mistakes, to those that did. And it results in America being left with a banking industry comprised of people less competent at banking, than what would otherwise have been the result.

And, of course, none of this even begins to touch the "bailouts" being conducted by below market interest rates allowing banks to borrow at zero, nor the implicit wealth transfers from well run to poorly run banks inherent in both central banking and FDIC insurance. Compared to those two, the bailouts is just another incremental step towards insulating those well connected and politically correct and powerful, from the cost of their own mistakes, by forcing the rest of us to bear the costs instead.

The game is set, and the

The game is set, and the king is crippled, who would play chess when your opponent has his hand hovering over the "I win" button?

Banks do, because the honey in this trap is 90% profit on top of deposits, and who could resist the system that allows you to make $90 profit on a $10 deposit??

Fractional reserve lending is a scam set up by the federal reserve to bankrupt banks when ever they want to consolidate wealth further, it just hasn't happened untill lately because they took so much from us in the 30's and again in the late 70's and the years since that there's been no need.

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.” Plato

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.” Plato

By George...

I believe he's GOT IT!

(I thought I was wrong once, but I was mistaken)

(I thought I was wrong once, but I was mistaken)