Was the Banking Bailout of 2008 a Bad Move?

by fwhagen Thu, 16 June 2016

Ok, I am not an economist.  I think I might have been if the computer industry didn’t exist, but I am not.  I'm not a historian, either.  This is all my personal opinion.

In 2007 – 2009, Trillions of U.S. Dollars were spent to “bailout” the U.S. financial system.  Many, many people thought this was a terrible way to spend taxpayer money in order to save banks, insurance companies, and mortgage brokers.  Most still do.  Sure banks make mega-millions in profits and few people hate mandatory insurance as much as I do.  “Let ‘em fail!” I have heard many times.  “Why do my taxes have to go to pay off fat-cats.” as well.  “Where’s my bailout?” was my favorite.  (Yes, sarcasm on my part.)  But was it so bad?  I’m not so sure.

Let’s go back a few years.  1929:  The start of the Great Depression.  Ask yourself, what caused the Depression?  If you’re like most Americans, as I was not so long ago, you will answer:  The Stock Market Crash of 1929, Black Tuesday.  But that’s actually not really true.  It was a trigger, certainly, but not the cause.  The thing that really pushed everything off the cliff was panic.  Panic over the banking systems.  People no longer trusted the banks and wanted all their money out, and now.  Back in those days, nearly all money was real.  And since much of it was tied up in investments, loans, etc., when millions of customers showed up and wanted their money, the bank locations didn’t have it.  Obviously.  That is still true today.  You wouldn’t expect your local BofA to have $Billions in the vault at every location.  So when bank clerks said, sorry, we’re all out, people freaked.  Of course, nobody panicked and paid back all their loans too, right?  So banks crashed too.  And suddenly, because the dollar was tied to the Gold Standard, and there was no money, the price of gold fell.  Less cash means the amount someone is willing to pay for it falls as well.  This had a larger cascading effect that impacted the entire world economy, which is the reason why most governments have rejected tying money to physical commodities.  And thus started the Great Depression.  BTW, inflated real estate pricing was a primary factor back then too.

Back to today, almost.  We could go back to the ‘90s and note that the Clinton administration (hopefully, the ONLY Clinton administration), persuaded Congress and/or the banks to make it easier for less… (uh, hard to find a good word to go here.  “capable” comes to mind) …qualified (?) people to get mortgages.  And sub-prime mortgages became a thing.  Banks were forced, or coerced, or agreed, to give out loans to people who were traditionally considered high-risk.  This radically increased demand in the housing markets.  And prices began to rise.  I was actually very lucky to get in early with a mortgage I should never have qualified for, but I made good on it.  After 10 years or so, the peak hit and now some lendees were unable to keep up with their really bad contracts and started to default.  This is normal.  Pricing started to correct, and more houses were on the market.  This is also normal.  And then there were more defaults and prices fell and banks were left with properties with loans that were much higher than the value of the housing.  And the bubble burst.

So in 2008, there are many banks that are left with assets they are unable to liquidate and obligations they can’t meet because of it.  So what do you do?  Let them fail?  Sure, why not.  I certainly never bought the “too big to fail” argument anyway.  But consider this: 

Let’s say I have $100,000.  What is my net worth?  Easy, $100k.  Now, you would like to buy a house, so I lend you $100k because I know you have a job and will pay me back with some interest.  So, what is my net worth now?  $0?  Well, no, you owe me $100k, so technically that money belongs to me.  $100k?  Actually, no, I expect that you will pay me interest on that, so I should be ahead in the end, and if you don’t pay, I get the house and whatever you paid so far.  Looks good for me, right?  Ok, now let’s say that you wanted to buy a house for $150k, but I only have $100k which is mine, but I am holding money for Jim long-term, in order to keep it safe for him, for a tiny fee, of course, after all my big vault is pretty nice and very safe.  So Jim stores $75k in my vault and wants access to some small amount of it at any time.  Ok, so I tell him I am going to use some of that money to help you out, so I give you a loan for $150k and keep $25k for Jim when he wants it.  Everyone is happy.  Until you lose your job.  Now you can’t pay me.  I can’t operate without rent and payroll, so I have to do something.  I could use Jim’s money, but he won’t be very happy about that, so I have to take the house and try to resell it.  So what is my net worth now?  Harder, but I have a $150k house and $25k of Jim’s cash, but I owe Jim $75k, so I am right around $100k again, right?  Suddenly Jim loses his job too, but it’s Ok, cause he has $75k saved up in my safe vault.  So he comes by and would like to have it back, please.  Of course, Jim, but I only have $25k right now.  Now what?  Jim needs his money but I don’t have it.  Jim blames me.  He says I should never have lent you the money, but the Fed said I really should or else.  So I have to liquidate whatever assets I have to pay Jim, which is only fair.  Now what’s my net worth?  And what if I can’t raise Jim’s money?  I will be ruined!

That’s the situation the U.S. financial industry was in by 2008.  Multiplied by millions in size and complexity.  By the way, I am not saying the banks were blameless.  ARM loans are just plain wrong.  I don’t normally mind preying on the stupid, but there must have been some shady deception going on with some of those.  In the super simple example above, my net work is still actually $100k, even though it’s all tied up in a bad investment.  The bank would sell the house eventually, and probably take a loss.  The hope is that the loss is less than the amount paid into the mortgage before the default.  And the 3rd party would get their money as promised.  The problem comes when the 3rd parties cannot wait for the physical assets to be liquidated and start to panic.  The Fed recognized this in 2008 and did something about it.  They made funds available to the banks in order to be liquid and not cause a panic.  The actually learned from the 1929 Crash.  BUT, and this is where I blame the news agencies, these were NOT gifts.  They were short-term loans with interest, albeit very large.  I need to look it up, but I believe they have all been paid back to the Fed (Us, the taxpayers), with interest.

So in the end, the banks took a loss but were not destroyed.  The housing industry eventually settled for the most part.  No panic ensued, although I suspect some people were disappointed by that (*cough* CNN *cough*).  And the Fed actually made a profit.  Unfortunately, a lot of people were hurt by buying houses they shouldn’t have and ruining their credit when they defaulted, and many more ended up with houses they will probably never profit from.    Many bank executives lost their jobs over this too, which no body is upset about, I imagine.  And, I don’t think the Clintons were hurt too bad.  It’s not like they’d try to run for public office again or anything….  *sigh*


Filed Under: Life | Politics | Rant

Inauguration Day 2009

by fwhagen Wed, 21 January 2009

And so, today we begin the four years of our Great Nation's biggest electoral mistake.

I truly hope I am wrong.


Filed Under: Politics

The Lie of the Democrats

by fwhagen Wed, 02 January 2008

I am not a Republican nor a Democrat.  I believe both parties are fundamentally flawed.  But I find it immensely amusing that the Democratic Party is a complete lie.  We do not live in a Democracy, but a Republic!  Think about it....


Filed Under: Politics

Why Socialism Doesn't Work

by fwhagen Wed, 12 December 2007

I heard a brilliant reason clever generalization for why Socialism, and by extension Communism, will always be doomed to failure:

Have you ever rented a car?  Did you wash it?

Edit:  Commenter inadvertantly reminds me that this is not a reason, but a gross simplification.  I don't discount the hundreds of other reasons and historical proofs for the failure of Marxist states.

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Filed Under: Life | Politics

Most Important American Holiday

by fwhagen Mon, 28 May 2007

EagleFlagToday is Memorial Day.  Today is the most important holiday, we, as Americans, celebrate.  Today is the day we should remember the sacrifice of so many that make so many things possible.  Even the ingrates that protest against the military should recognize that they would not even have that ability if not for the men who have died to make it possible.

So fly your flag high today, remember the brave servicemen who gave up everything so that we might, and see today as much more than a day off from work.

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Filed Under: History | Life | Military | Politics

Armed Forces Day

by fwhagen Sat, 19 May 2007

Now here's a holiday I can appreciate.  Armed Forces Day is celebrated on the 3rd Saturday of May to honor all those in our military.  And you know what?  THEY DESERVE IT! 

So why is this 60 year old holiday almost completely obscured, but we all get pounded by "Administrative Assistants" Day?  Shows a profound disconnect in American priorities.

So, Happy Armed Forces Day!  I personally thank all of you in the service of our country.  I couldn't do it, so am doubly grateful that you do!  Stop by, the first round's on me.

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Filed Under: History | Life | Military | Politics

The Fall of the Soviet Union

by fwhagen Thu, 12 April 2007

I was watching an interesting show this evening about geopolitics in the early '90s.  They mentioned, admittedly in passing, the collapse of the Soviet Union as an economic and human rights victory.  I got me thinking.  I was in my twenties then and remember the state of the world as we were led to believe it, and I don't really think that was completely accurate.

You see, in the '80s, we were scared of the Red Menace.  Reagan was elected much because of his stance against the "Evil Empire".  We were in an arms race that looked like there was no end, not that it didn't give us some nice things like computers, cell phones, medicines, etc.  We were told that the Soviets were essentially ahead of us on all fronts.  And don't forget, it was less than 20 years since a humiliating defeat in Southeast Asia, Viet Nam specifically.

Then some dipshit dictator in the Middle East decided he needed even more oil.  Iraq invaded Kuwait in 1990.  The US and UN went into diplomatic overdrive for several months to no avail.  President George Bush gave Hussein an ultimatum to get out of the Kuwait, and the whole world laughed.  At home, everybody was afraid of Viet Nam II.  Even my mom was afraid that I was going to get drafted, which was naive since I was in college and working a DOD contract.  In January 1991, true to his word, Bush let Iraq have it.

So why did the Soviet Union fall?  In my opinion, there are 3 reasons: 

The first was the F-117 Stealth Fighter.  We kept it a secret for over 10 years and it was more effective than anyone predicted in the Gulf War.  1200 sorties with 0 losses.  It rendered the entire Soviet Defense Network obsolete overnight.  That was going to be very expensive system for them to upgrade or replace in order to counter the Wobbly Goblin.

The second was the F-15 Eagle.  It made it's mark in the Israeli Air Force as the only air combat aircraft to never sustain a loss.  I believe it still holds that distinction.  And the E model proved to be an incredibly effective ground attack bomber during the Gulf War.  The Soviets had just spent an incredible amount of effort and cost in developing what was considered in 1991 to be the 2 best combat fighters ever, the MiG-29 Fulcrum and Su27 Flanker.  Granted Iraqi pilots are inferior to super-power pilots, but the F-15s made short work of them.  And the Soviets had nothing in the works.  Quick build a newer, better plane fast!

The Gulf War really rocked the Soviet Union.  We fought that conflict as hard as we did for that very reason.  But then the first B-2 Spirit Stealth Bomber was delivered to the USAF in 1993 and very public demonstrated to be even more effective than the F-117.  In my opinion, that's when the Politburo finally gave up.  They had spent themselves into a really bad situation, tried to fix that by invading Afghanistan in the '80s unsuccessfully, and then we go and completely decimate the world's 4th largest army in a matter of weeks.  On top of that, we had an enormous economic and technical boom on our hands because of it.  They were left with no choice, their people seized the opportunity and the USSR is a historical failure.

Are 3 planes the only reasons for the collapse of the USSR?  No, of course not.  Without the incredible American Naval Forces, the success of the M1A1 and M2A1, among other systems, all the air power in the world is useless.  And the technology and market forces during that time, much of which was directly related to military spending, played an enormous role.  But the Red Army was the primary focus of Soviet spending at the end of the Cold War.  The Gulf War and the deployment of the B-2 bomber proved that their economic gamble was a bust.

Thanks to FAS.org for the awesome images.  Visit them for more information on all US Weapon Systems and other very interesting geopolitics.

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Filed Under: History | Military | Politics

I Am Not an Economist, Nor Do I Play One on TV

by fwhagen Fri, 16 March 2007

Very intriguing "Quote of the Day" showed up on my Google homepage today:

Much of the social history of the Western world over the past three decades has involved replacing what worked with what sounded good.
  - Thomas Sowell

Upon following the link provided, you will get a longer, and rather more complete, version of the idea

Much of the social history of the Western world over the past three decades has involved replacing what worked with what sounded good. In area after area - crime, education, housing, race relations - the situation has gotten worse after the bright new theories were put into operation. The amazing thing is that this history of failure and disaster has neither discouraged the social engineers nor discredited them.
Thomas Sowell, Is Reality Optional?, 1993

Now, I really like this quote.  It matches my own world view that I have deduced from reading a lot of different material, better than most I've heard publicly, but I have never heard of Thomas Sowell.  That surprised me as usually characters of this nature are hailed as Nazis or Racists in the popular press.  I decided I wanted to include the quote on this site, but needed to do a little digging first.  I will not post quotes from individuals I don't wish to provide exposure to, unless it is to prove a point, usually negative, about that person.  This is what I found:

Thomas Sowell is an economist for Stanford University, is well published, award winning and respected social conservative, according to Wikipedia.  I did not read the entire article as it is rather lengthy.  But his focus seems to be in social programs and their failures in the 20th Century.  Many of the summaries of his work hint that racial oppression is not a significant factor in the last 3 or 4 decades in the problems of lower income groups.  Further digging turned up an interesting interview that included some more intriguing thoughts:

Thomas Sowell: A flat tax would not penalize additional efforts at an increasingly higher rate. This would reduce the discouragements to such efforts and to the taking of risks.

Interesting, I've been saying that a graduated tax penalizes the successful and ultimately discourages risk, but I am not an economist.  Not directly social, but a very important issue to me as a mid-income taxpayer.

Thomas Sowell: Affirmative action has been a boon to those blacks who were already affluent and particularly for those who were rich but has done little or nothing for those blacks who are neither. Moreover empirical data from other countries around the world shows the same general pattern from group preferences.

That's not a popular opinion, and bound to be viewed racially.

Thomas Sowell: The people made worse off by slavery were those who were enslaved. Their descendants would have been worse off today if born in Africa instead of America. Put differently, the terrible fate of their ancestors benefitted them. If those who were enslaved were alive, they would deserve huge reparations and their captors would deserve worse punishments than our laws allow. But death has put both beyond our reach. Frustrating as that may be, creating new injustices among the living will not change that.

The "Back to Africa" plan in intelligent terms.  Also very controversial, and my point exactly; not that we should send the complainer to Africa, but modern day descendants are better off because of the suffering of their ancestors.  I will go one step further and challenge anyone to come up with an ethnic group that couldn't make that claim.

Now about this time, you are probably wondering why you haven't heard of this man before.  Surely the race-card toting headline-chasers would have exposed him as hateful and oppressive.  But I then found his personal site, including a biography.  Check it out yourself, but here is the surprise:


He is completely non-biased.


Filed Under: Politics

Obligatory Semi-Annual DST Bash

by fwhagen Fri, 09 March 2007

Once again it is time for me to rail against the ignorance that is Daylight Saving Time.  But I will spare the vehement accusations of stupidity of the whole system and concentrate on our state of resolution.

I have always advocated removing DST entirely and possible all American timezones as well.  Why not simply use GMT?  It's all just arbitrary numbering anyway; after all, I use 24-hour time myself.  Anyway, the U.S. Congress, whose record of learning valuable lessons from the past include issuing yet another dollar coin the size of a quarter after the last two incarnations failed, decided to change DST this year.  But instead of a move toward elimination, they decided that it should come 3 weeks earlier and last longer.  I think it is now the norm, not the exception!

"Who cares?", you say?  How about every IT shop that does any business on this continent!  I will be working on Sunday to ensure all of my systems don't mysterious choke because of syncing issues, as will every other responsible admin and/or developer that has servers in this country.  Hopefully, it will only be the 30 minutes it takes to validate functionality, but who knows.

Sometimes I am SO proud to be American.  Yeah, whatever...

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Filed Under: Politics | Rant

Al Gore - Shocking Hypocrite?

by fwhagen Wed, 07 March 2007

Or just (Democrat) politics, as usual.  Only days after Gore conspicuously accepted the Oscar for An Inconvenient Truth, a propaganda piece on energy depletion, ABC News exposes Gore as a incredible hypocrite.  It seems that Mr Environment uses 20 times the amount of energy as the national average.  While I don't condemn him for that practice, despite a personal feeling that it is a ridiculous inefficiency, I do find him in contempt of humanity and desire his public exposure as a fraud.  This is the politico that is constantly harping that I, and you, are destroying the planet through frivolous activities as driving to work and heating our homes.

Shenanigans!!  I am calling Shenanigans on Al Gore.

The man is a dratkcuf.  If I find out that he was behind the DST embarrasment, I just may have to start a crusade against the corrupt bastard.

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Filed Under: Politics | Rant