This tidbit.
Patrick
Patrick is a mid-40 year old geek with an undergraduate degree in mathematics and a master's degree in Information Systems. Nothing he says here has anything to do with the official position of his employer or any other institution.
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I like to think that TARP is a non-partisan issue, since both parties are bought and paid for by the monied class, and therefor a topic of discussion that can be argued on the merits.
So glad that we restructured banking debt rather than household debt.Report
Precisely. We live, as I’ve often said here, in a reverse socialist system: private profits, socialized risk, and since those in power benefit from that system, they have absolutely no incentive to change it unless we demand that they do so. And we’re not going to demand that they do so, of course, because we’re us.Report
When all of this was going on, this was the position I had from the get go. I argued a lot about it with a friend, and it went something like this…
“Why should we bail them out?”
“If we don’t, the world economy will collapse.”
“Oh. Still, they made bad decisions and the natural consequences of those decisions are to go belly up.”
“But what about the rest of us?”
“Well, we largely stood idly by while it went on and/or continued to vote in folks who allowed or encouraged this to happen. And, ya know, maybe everything *WON’T* collapse?”
“YOU’RE CRAZY!”
“Oh.”Report
It’s pretty easy for a country with half the population of Austin, Texas to go about refusing to bail out its banks. Especially when they have now essentially lost their ability to buy ANYTHING abroad (try using an Icelandic Krona to buy a latte in the Faro Islands) and possibly creating the potential for an enormous problem down the line.
This is not so easy when your trade reserves alone account for $3.4 trillion dollars and your GDP is worth about a quarter of the world’s. A default on that scale and a loss on US dollars on that level wouldn’t be the end of the US economy….it’d be the end of the world economy as we know it.Report
Nob is exactly correct hereReport
It’s certainly a fair point. And given that the U.S. dollar, in the aftermath of the financial blowup, has blown away any dreams that existed that the Euro might ever replace it as the fiat currency, it’s a compelling one.
I’m not entirely convinced that being the fiat currency is awesome, though. There’s no counterfactual to measure against.Report
Being the reserve currency is awesome. There’s plenty of counterfactuals to measure against. Including 1. the experience of just about everyone who doesn’t have a reserve currency suffering massive depreciation problems. (See: Argentina, Malaysia, Thailand, etc. etc. etc. this is a very long list)Report
Or for that matter, see what happened to the British economy in the 70s when the stirling ceased to be a viable reserve currency. The effects on their economy were ugly and helped usher in the Tories and Thatcher to dismantle the post-war consensus.Report
I love how the second comment at that article blames everything on the J-E-W-S
and one of the replies says (paraphrased) “no way, it’s the commies!”
*****
On the other hand, someone says:
“What these very smart people seem to be forgetting is that the losses that the banks passed on to the people where taken by foreign citizens. If in America you deposited money into a savings bank and it was unable to pay the FDIC would pay you so in essence the tax payer takes the loss either way. The European holders of Iceland bank accounts were covered by their local governments so Iceland essential forced foreigners to foot the bill.
So I’m really not surprised it worked out great for them. They even had a national referendum on whether they should payback the Europeans who made deposits and the people voted no. These people didn’t make risky investments they deposited into an Iceland Bank they thought had a good interest rate.” (emphasis added)
Any thoughts?Report
Yeah, unfortunately the US didn’t have the option of saying “Screw it, we’ll let the rest of the world deal with it”.Report
You wouldn’t (necessarily) be passing the (entire) loss on to the taxpayer either way, because FDIC as a limit, for one, and the banks still have assets, number two. I’m not certain that the bold faced claim is correct; is it? How did the Icelandic account holders fare, did they lose their shorts or where they treated differently from the other depositors?
Granted, you’d eat quite a bit of loss, but bankrupting the bank, paying off the account holders, and blowing the institution up would sort of render the current, “Well, the banks still want to keep their financial activities and investment activities mixed!” problem moot.Report
I’m only quoting, not verifying; if it doesn’t actually work the way the poster said it does, I’d be interested to know that.
Combining this post with the article (and assuming the post is correct), Iceland used its equivalent of FDIC to guarantee the investments of private citizens, and threw everything else in a volcano. Icelandic businesses went bankrupt, their assets were bought, their creditors ate the losses, and everyone moved on. International investors? In the Euro zone they had their own FDIC, and as for anyone else who cared? It’s not like anyone’s going to invade the place while the US Navy is still around.Report
They did indeed make risky investments by depositing their money in one of the Icelandic banks in search of the higher interest rates offered. It’s difficult to see why the Icelandic public should have to cover for their mistakes.
In any case, the argument usually made concerning the U.S. was that at least the bank bondholders should have shouldered the losses before the taxpayers. Whether depositors should have had any exposure is debatable, but the case for bailing out bondholders was very weak.Report
On balance it’s important to remember that Iceland didn’t get a free lunch on this deal either. The Krona is essentially monopoly money right now. The Icelandic government was seriously considering adopting the Canadian dollar. That’s a direct result of the bath that foreign investors took.
On balance Iceland and Ireland together represent both ends of the spectrum for reactions to this crisis. Iceland stuck it to the bankers and foreign creditors. In exchange they have significant economic growth, stable government finances, currency that you couldn’t buy a latte with outside the country and a nasty reputation as a bad place for foreigners to invest. Ireland on the other hand has a sterling reputation as a foreign investment location and a stable currency but their government finances are an absolute wreck, fat-cat bankers essentially cleaned out the national coffers, foreigners got off scott free and their government is loathed by their own populace.
Somewhere between those two poles is the ideal way to deal with these kind of fiascos.Report
Texas has the right idea, they just apply it to the wrong people.Report
In other words, the situation in Iceland is good for people who live there (provided they don’t want to travel overseas soon) and bad for people who invest there.
The situation in Ireland is good for people who invest there and bad for people who live there.
Iceland’s choice seems far preferable. A government’s first duty is to its citizens, not to foreign investors.Report
If Ireland were not part of the Eurozone, it’s likely they would’ve fared better. Given the extremely sharp drop in Icelandic consumption and a GDP contraction of about one tenth since their 2007 peak…well…yeah, the numbers are actually pretty bad, and are likely to look even worse over the long run as the krona remains a basically worthless currency and inflation is in the high teens.Report
I’d say to one degree you’re correct Katherine but it’s important to keep in mind that Iceland has to import a great deal of stuff so their currency getting flattened has been quite terrible for the welfare of the people who live there as well. Strict financial restrictions and skyrocketting costs for any products they have to import (aka everything except aluminum, energy and fish) are not fun for residents in Iceland.
But still, they at least have faith in their government. The Irish essentially bailed their wealthy bankers out and got little in return.Report
That doesn’t make much sense to me unless the European governments cobbled together something to bail out natives that had deposit accounts in the Icelandic banks. Our FDIC wouldn’t cover any American account-holders in those banks (since those banks wouldn’t have been members of FDIC and paying premiums into the system) so I don’t know why the Euro equivalents would do so. Especially since Iceland isn’t in the Euro zone or anything.
This seems to confuse bond-holders (creditors) with depositors. Granted, both groups are creditors in a sense, but there’s a difference between being holding a checking account in a bank (being a customer) and loaning a bank money by buying commercial paper.Report
I dunno. Iceland is 300,000 people surrounded by fish. They also got $2B from the IMF. Not sure if this is scalable.Report
TARP was ultimately just a cash flow boost, wasn’t it? My understanding is that it was pretty much entirely paid back, with most of the net cost coming from assistance to individual homeowners.Report
Not so much a boost to cash flow as shoring up the balance sheet. My understanding was that TARP was the Fed buying bad paper (MBS’s, CDS’s, etc.) from the commercial banks and taking on those potential losses. I’m not sure how you would “pay back” something like that since it wasn’t a loan. On the other hand, the programs to help individual homeowners have been notoriously ineffective since they depended on banks to work with the program–something they haven’t seemed eager to do, preferring to foreclose instead. Since very few banks actually participated I don’t think that program (HAMP? or something like that) has actually cost much–unfortunately.Report
HARP: Homeowners Asset Relief Program.Report
Thanks for this Patrick.
Trying to cure gamblers of gambling by throwing money at them always appeared misguided. Inflation will start eating its tail eventually, probably December maybe January.Report