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Why Didn't the Gov't Bail Out People Instead of Banks?

Name: Tommie Kelly
City & State: Cave Spring, Ga.

Question: I have never understood why it would not have been more effective to have "bailed out" people directly, and banks indirectly, by giving money to people instead of banks.

The money would have necessarily have had to move through the banks, thus increasing cash flow, but would not have become bank property as it did, with which the banks could do anything they liked, as indeed they did, which did not actually "help the economy" in any way that I can see.

Meanwhile, they've done as little as possible to help people facing foreclosure. What have I missed here? How did simply improving the banks' balance sheets help any of the rest of United States, the Joe Blows?

Paul Solman: Remember, Tommie, how desperate the situation seemed a year or so ago. As I often wrote at the time, credence in the financial system was dissolving. The credibility of banks to pay back depositors (especially those with accounts beyond the insurance limits -- by far most of the money deposited by companies and the like) was on the line. And what about the credibility of credit itself? If those same banks couldn't come up with enough money to honor their debts, our credit cards might suddenly cease to work. Credence; credibility; credit: The entire system was perceived to be on the brink.

At that moment, how exactly would the government have bailed out the system by giving money to you, me, and the rest of us? How quickly? In what form? A lump sum to each family? How much for each? Suppose many of us DIDN'T put the money in the banks and just held onto it. Frankly, in the environment of the time -- and with banks teetering left and right -- that's what I might have done. Not you?

The solution to bail out the banks was one of desperation. That their creditors were thus rescued, and their executives and now even shareholders, to the extent their stock prices have come back, may be grossly unfair and perhaps unwarranted. But the phrases "too big to fail" and "too interconnected to fail" aren't used lightly. They reflect a consensus.

-- Posted November 16, 2009 | Comments (0) | Permalink