BRYAN CAPLAN
May 7, 2013
Keynesian Bets: What's Out There
May 6, 2013
Keynesian Bets Bleg
May 6, 2013
The Pyramid of Macroeconomic Insight and Virtue
May 2, 2013
A Natalist Provision
May 1, 2013
I Was a Teenage Misanthrope
DAVID HENDERSON
May 5, 2013
John Thacker on Vaccinations and the Sequester
May 3, 2013
Chef Rudy's Virtues Project
May 2, 2013
My take on Reinhart and Rogoff
May 1, 2013
Medicare Kills a Program
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I get tired of this trope. Was Lehman government-owned? Did their bondholders get bailed out? Was Washington Mutual government-owned? What happened to their preferred shareholders?
You can argue that bondholders of Fannie, Freddie, Citi, and Bank of America got government support, but what happened to their shareholders, or those of Bear or AIG? They were effectively wiped out.
The government's response to the 2008 financial crisis was varied and ad-hoc. Some might say it was nuanced and context-sensitive. But one thing it wasn't was a uniform "bailout" of shareholders. Most shareholders of financial firms lost money in 2008.
Isn't the FDIC's job to keep banks from failing?
Milton Friedman seemed to think so in, Why the American Economy is Depression Proof.
Shareholders should have been universally wiped out - accordance with the bancruptcy proceedings. FDIC is insurance that guarantees a fixed return of assets to depositors. That's all they do or should do.
In any bank failure the first in line are depositors. IF the bank does not have adequate assets to cover depositors then FDIC guarantees those depositors up to 100,000.
If FDIC has to cover depositors then there is nothing left over for shareholders, bondholders, etc.
I suggest that if we were to follow the laws we wouldn't be having this discussion at all. AIG is a prime example. AIG - the part that guaranteed swaps, had no real assets so that should have been the end of their initial involvement. Those who used those guarantees could have tried to sue in Court and go after some other assets that AIG had access to (their insurance businesses for example), but that is a different story.
Bottom line is the government with the likes of Mr. Geitner of the Fed and later of the Treasury, bailed out AIG in order to circumvent the bankrupcy proceedings. In order to do this they picked winners and losers.
In the end, "Too Big to Fail" is a euphamism for government ownership of those companies they think they want to bet on.