I won’t go into the details of the piece linked to above from the 2/16/2013 NY Times by Gretchen Morgenson other than to say it is another example of the Fed throwing buckets of money at people it favors, rather I would like to think about what is actually going on when we engage in these bailouts.
If we were just bailing damage from mortgages gone bad that would be one thing but really the scope of the financial crisis was caused by all the other crap that banks had leveraged themselves up with. A lot of the losses banks incurred were from CDOs. Now there is the idea that the investment community was begging for anything to invest in and that is why these CDOs became so popular, but the truth of the matter is that most of these were held in house by the people who created them, that there was no market for them is part of the problem that occurred when the financial crisis went into bloom, these things were actually very illiquid.
So we aren’t simply bailing out the effects of a housing bubble created by exuberant borrowers and predatory lending, we are bailing out stupidity on the part of bankers. These people who inflated their balance sheets with all kinds of crap when the substance behind them was, both in capital reserves and the underlying assets of the paper, total bullshit. We are bailing out a stupid game which wasn’t even grounded in much of anything.
Now there are calls that a lot of these people should have been put in jail. That may be true, but at the very least they should be out of business. How you can make such terrible errors in judgement and remain in business is beyond most any reasonable line of logic, how can you run a business so poorly and still be there?