Even since the financial crisis of 2008, the media have done an incredibly sloppy, if not purposefully biased, job of explaining what’s been going on. I’m going to take a crack at clearing up a few misconceptions.
1. The bank “bailout”. This has been presented as a gift of billions of dollars to the banks. It wasn’t, it was a loan, and it has been paid back.
Why rescue banks? Well, we need them. Banks are sort of like phone companies; they are exchanges that let millions of people interact more easily. Can you imagine what a PITA it would be if you couldn’t mail a check to pay a bill?
Suppose a major wireless carrier became insolvent – say AT&T. Suddenly they can’t meet payroll, and they send everyone home. The economic dislocation would be huge! Your cell phone wouldn’t work, your Internet would work, even your land line might not work, depending on where you live.
Furthermore, shutting down the company punishes thousands of ordinary workers who are NOT at fault. Why should they lose their jobs?
The better solution is for the Feds to step in, take over day-to-day operations, fire the CEO and the board of directors, and bring in (or promote) some new people to run the company.
Same thing with banks. In fact, this is what the FDIC does, and does very well, a few times a month. Smaller banks become insolvent fairly often, and the FDIC is literally world-famous for the efficiency with which it steps in and cleans up the mess, so that ordinary folks don’t get hurt. But for some reason the biggest banks are exempt from this. It makes no sense.
The result was that when some big banks became insolvent, they were rescued by a much more ad-hoc process, and it was not done as well as it could be. For one thing, the Feds did NOT fire the CEO and the boards of directors, as they should have. But, overall, the Feds did the right thing in keeping the big banks going. A general collapse of banking would be a crisis almost impossible to imagine. In the 1930s, many people never used banks, and could do okay without them. Today, that’s not true. We’d be utterly screwed, and far poorer, if the banking system collapse.