The bailout didn't save anything — except some bank creditors

It's increasingly en vogue to assert — as if it's some enlightened corrective to populist anger — that the bailouts of 2008 were smashing successes that saved the economy. There's little evidence of this, and there's plenty of reason to doubt it. Today, from the Business Insider and investor John Hussman, we get a good analysis of how TARP didn't help.

He argues that our economy can take the collapse of banks, but that Fed requirements on reserves lead to disorderly liquidations, which cause the stuff to hit the fan. Hussman argues that the key to avoiding a meltdown was changing accounting rules. Anyway, here's the most interesting part:

 If you carefully observe what happened in 2008, the large-scale collapse of the financial markets and the U.S. economy started literally sixty seconds after TARP was passed by Congress on October 3, 2008. At that moment, the world was told not that the smooth operation of the global financial system would be ensured by taking receivership of failing financial institutions; not that the focus of policy would be the protection of depositors, customers, and U.S. fiscal stability; but instead that insolvent private balance sheets would now be defended, subject to the arbitrary decisions of policy makers in which nobody had confidence. Lehman's failure simply told investors that these decisions could be completely arbitrary, since there was really no operative distinction between Bear Stearns, which was saved, and Lehman, which was not. Moreover, in order to pass TARP, the public had to be convinced that a global meltdown would result if financial institutions weren't preserved in their existing form. In this way, policy makers created a crisis of confidence.

Skip forward and carefully observe what happened in 2009, and you'll see that the crisis was suspended once the FASB threw out rules requiring financial companies to report their assets at market value, while at the same time, the Federal Reserve illegally broadened the definition of “government agency” in Section 14(b) of the Federal Reserve Act in order to purchase $1.5 trillion of Fannie Mae and Freddie Mac obligations. These actions replaced the arbitrary discretion of policy makers with confidence that no major institution would be at risk of failing because, in effect, meaningful capital standards would no longer apply.

Thus, our policy makers first created a crisis of confidence, and then resolved it by legalizing a global Ponzi scheme.

The takeaway: maybe “saving the economy” — however it happened — was about blowing up another bubble.

Beltway ConfidentialUS

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