# What People Still Don’t Get About Bailouts  ## Metadata - Author:: [[Michael Grunwald]] - Full Title:: What People Still Don’t Get About Bailouts - Category: #articles - URL: https://apple.news/A3xULl1GMSYmBY9Bo8Bec3A ## Highlights > Did they learn none of the lessons from the 2008 meltdown? ([View Highlight](https://read.readwise.io/read/01gvx7caq85770nabbd07f5e7d)) > Actually, yes, they did. The government’s financial-crisis managers clearly studied the lessons of 2008, which is one reason the collapse of Silicon Valley Bank a week ago doesn’t seem to have created another cataclysm, at least so far ([View Highlight](https://read.readwise.io/read/01gvx7csc3bn8x9g5a2qrstrn7)) > It’s the public that’s never understood those lessons, which is one reason the public is likely to draw the wrong conclusions about the SVB mess too. And the most important lesson is the hardest to understand: Good financial-crisis management isn’t supposed to seem fair. ([View Highlight](https://read.readwise.io/read/01gvx7d4fna8f1e1kdjg0tag0x)) > They focus on putting out the flames, because fires can spread, and out-of-control infernos can be disasters for everyone. ([View Highlight](https://read.readwise.io/read/01gvx7dyd9a39grnhb4gx2xc7b)) > During the 2008 financial crisis, there was no way to extinguish the flames without bailing out some of the financial arsonists, although it’s a myth that none of them paid any price, and the bailouts ended up turning a profit for taxpayers ([View Highlight](https://read.readwise.io/read/01gvx7em64s057q2dmhbahe0me)) > They were protected to quell a panic, because panic is what turns local financial fires into systemic conflagrations. ([View Highlight](https://read.readwise.io/read/01gvx7fhtkb3a9zv4z5y4tw78w)) > It sends the calming message that everyone should feel safe stashing cash in banks. But it definitely looks bad; bailouts always do. ([View Highlight](https://read.readwise.io/read/01gvx7g9kx6pgxq9rf7pc61fva)) > trusts ([View Highlight](https://read.readwise.io/read/01gvx7qywn1ywfs5c76zhrjvrm)) > *credit* comes from the Latin for “believe.” ([View Highlight](https://read.readwise.io/read/01gvx7r333yk928g20ka4g2g1j)) > There’s also a specific weakness illustrated by the bank run in [*It’s a Wonderful Life*](http://youtube.com/watch?v=2GDlioFhoAk): Banks don’t keep most of their deposits in the bank ([View Highlight](https://read.readwise.io/read/01gvx7hh2axxrrcjvzny0ppz9y)) > After bank runs helped start the Great Depression, the newly created Federal Deposit Insurance Corporation began insuring deposits—originally up to $2,500, now up to $250,000—to eliminate the incentive for freaked-out depositors to run ([View Highlight](https://read.readwise.io/read/01gvx7nj4m5cswdjp8cvp4sh3b)) > It’s an excellent confidence booster, especially now that a bank run no longer requires an actual run to the bank, just a click of a button. ([View Highlight](https://read.readwise.io/read/01gvx7nmp12qavr517b4bh6k08)) > Countrywide Financial, IndyMac, Bear Stearns, Washington Mutual, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG all collapsed when their short-term creditors lost confidence and demanded their money back. ([View Highlight](https://read.readwise.io/read/01gvx7s3gjd3bjw1e8mqh90s17)) > The government’s crisis managers tried desperately to eliminate incentives to run ([View Highlight](https://read.readwise.io/read/01gvx7ss9xr1kv0cf5pckczvc4)) > The conventional wisdom at the time, and still today, was that the government bailed out Wall Street while screwing Main Street. But the reason the government bailed out Wall Street was to prevent the banking crisis from turning into a second Great Depression that really would have screwed Main Street. The financial rescues of 2008 all helped stabilize the system; the fall of Lehman, which the government failed to rescue, is what nearly dragged the system into the abyss. ([View Highlight](https://read.readwise.io/read/01gvx7ta82x91bttbswc1mgwxb)) > And remember, the shareholders of all those failed firms were totally or virtually wiped out. The CEOs lost their jobs ([View Highlight](https://read.readwise.io/read/01gvx7ttgadvxk5nv5t417a4ev)) > The government put a lot of tax money at risk, but it all got paid back with interest ([View Highlight](https://read.readwise.io/read/01gvx7txyr0hj5eya0tnbgrexd)) > And under President Barack Obama, Washington passed a separate $800 billion economic stimulus bill for Main Street, another subject I’ve spent [too much time](https://www.amazon.com/New-Deal-Hidden-Story-Change/dp/1451642334) thinking about, that helped end the recession in a hurry. ([View Highlight](https://read.readwise.io/read/01gvx7vhbh2fs816atkkxm57bh)) > The mega-bailouts of 2008 did, in fact, protect some irresponsible financial gamblers from the consequences of their bad bets, which did, unavoidably, send a bad message about irresponsible gambling. That’s why Obama signed the Dodd-Frank financial-reform law in 2010, which essentially made the fire code much tougher and required more banklike firms to obey it ([View Highlight](https://read.readwise.io/read/01gvx7w679nbykvhb3qjqe46ha)) > Financial stability, unfortunately, tends to breed overconfidence. I must confess that in 2018 when President Donald Trump signed a bill relaxing Dodd-Frank’s oversight rules for SVB-size banks, I didn’t think it was a good idea, but I didn’t think it was a big deal, either. (Whoops.) ([View Highlight](https://read.readwise.io/read/01gvx7wsfav7xx2g2chmntdkgs)) > More oversight would have been better because SVB was a disaster waiting to happen—a bank with [*94 percent*](https://apnews.com/article/silicon-valley-bank-failure-deposits-fdic-8011ea377d8f9941032790ce1d704c5a) of its deposits uninsured, uniquely vulnerable to a run ([View Highlight](https://read.readwise.io/read/01gvx7yezq01jtwkzsae5zeyey)) > But SVB was a classic bank run, and a pretty obvious contagion risk for similarly sized banks, so the crisis managers basically followed the playbook from 2008. ([View Highlight](https://read.readwise.io/read/01gvx7zc1azywbxs5nq07ye3z5)) > When confidence goes, it goes fast. ([View Highlight](https://read.readwise.io/read/01gvx80aaemymnye16fhy1kbe4)) > But this was an unusual situation where the Federal Reserve, the FDIC, and the Treasury Department could act quickly and decisively without creating serious moral hazard ([View Highlight](https://read.readwise.io/read/01gvx80rrdszd4rh4g8wen1269)) > They [ousted](https://www.sfchronicle.com/bayarea/article/silicon-valley-bank-investors-executives-17836135.php) the SVB managers who got the world into this mess ([View Highlight](https://read.readwise.io/read/01gvx80vhedje3r4hdnhbv19h1)) > They let SVB’s shareholders lose all their equity ([View Highlight](https://read.readwise.io/read/01gvx80zeb2tere8cccv62e010)) > They didn’t even backstop all of SVB’s bondholders ([View Highlight](https://read.readwise.io/read/01gvx814cntmrhamc0vjvy75wf)) > But the government immediately made cheap liquidity widely available and guaranteed all of the uninsured deposits ([View Highlight](https://read.readwise.io/read/01gvx824bp5ffyxfnqfe2fp9xm)) > The thing is, bailing out depositors who happen to park their cash in the wrong bank doesn’t encourage risk taking ([View Highlight](https://read.readwise.io/read/01gvx82g6gn8x44zdrc8maz3vz)) > Parking cash in a bank is supposed to be the opposite of risk taking! ([View Highlight](https://read.readwise.io/read/01gvx82krgwmmpkhakb6zyfw41)) > Bailouts are inevitably suboptimal, and they inevitably make people mad ([View Highlight](https://read.readwise.io/read/01gvx82xj3chdv81xnf46s59rc)) > But continuing problems at First Republic Bank and a few other regional banks caught up in the frenzy suggest otherwise ([View Highlight](https://read.readwise.io/read/01gvx841y4h4q59ppwd5npnmfs)) > student loans, as burdensome as they might be, don’t have the potential to create global calamities when they don’t get paid back in full ([View Highlight](https://read.readwise.io/read/01gvx84xag43fq18mc7fshyjbt)) > As long as financial institutions borrow short and lend long, they will always be vulnerable to runs. And risk will always migrate to the path of least resistance, especially in times of stability, when the risk doesn’t seem that risky. ([View Highlight](https://read.readwise.io/read/01gvx86hsdgbqdkp7esy9dyw6d)) > We should have the humility to recognize we probably won’t anticipate where the next fire will start either ([View Highlight](https://read.readwise.io/read/01gvx86zxhv49tvkadfbmsvpa1)) # What People Still Don’t Get About Bailouts  ## Metadata - Author:: [[Michael Grunwald]] - Full Title:: What People Still Don’t Get About Bailouts - Category: #articles - URL: https://apple.news/A3xULl1GMSYmBY9Bo8Bec3A ## Highlights > Did they learn none of the lessons from the 2008 meltdown? ([View Highlight](https://read.readwise.io/read/01gvx7caq85770nabbd07f5e7d)) > Actually, yes, they did. The government’s financial-crisis managers clearly studied the lessons of 2008, which is one reason the collapse of Silicon Valley Bank a week ago doesn’t seem to have created another cataclysm, at least so far ([View Highlight](https://read.readwise.io/read/01gvx7csc3bn8x9g5a2qrstrn7)) > It’s the public that’s never understood those lessons, which is one reason the public is likely to draw the wrong conclusions about the SVB mess too. And the most important lesson is the hardest to understand: Good financial-crisis management isn’t supposed to seem fair. ([View Highlight](https://read.readwise.io/read/01gvx7d4fna8f1e1kdjg0tag0x)) > They focus on putting out the flames, because fires can spread, and out-of-control infernos can be disasters for everyone. ([View Highlight](https://read.readwise.io/read/01gvx7dyd9a39grnhb4gx2xc7b)) > During the 2008 financial crisis, there was no way to extinguish the flames without bailing out some of the financial arsonists, although it’s a myth that none of them paid any price, and the bailouts ended up turning a profit for taxpayers ([View Highlight](https://read.readwise.io/read/01gvx7em64s057q2dmhbahe0me)) > They were protected to quell a panic, because panic is what turns local financial fires into systemic conflagrations. ([View Highlight](https://read.readwise.io/read/01gvx7fhtkb3a9zv4z5y4tw78w)) > It sends the calming message that everyone should feel safe stashing cash in banks. But it definitely looks bad; bailouts always do. ([View Highlight](https://read.readwise.io/read/01gvx7g9kx6pgxq9rf7pc61fva)) > trusts ([View Highlight](https://read.readwise.io/read/01gvx7qywn1ywfs5c76zhrjvrm)) > *credit* comes from the Latin for “believe.” ([View Highlight](https://read.readwise.io/read/01gvx7r333yk928g20ka4g2g1j)) > There’s also a specific weakness illustrated by the bank run in [*It’s a Wonderful Life*](http://youtube.com/watch?v=2GDlioFhoAk): Banks don’t keep most of their deposits in the bank ([View Highlight](https://read.readwise.io/read/01gvx7hh2axxrrcjvzny0ppz9y)) > After bank runs helped start the Great Depression, the newly created Federal Deposit Insurance Corporation began insuring deposits—originally up to $2,500, now up to $250,000—to eliminate the incentive for freaked-out depositors to run ([View Highlight](https://read.readwise.io/read/01gvx7nj4m5cswdjp8cvp4sh3b)) > It’s an excellent confidence booster, especially now that a bank run no longer requires an actual run to the bank, just a click of a button. ([View Highlight](https://read.readwise.io/read/01gvx7nmp12qavr517b4bh6k08)) > Countrywide Financial, IndyMac, Bear Stearns, Washington Mutual, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG all collapsed when their short-term creditors lost confidence and demanded their money back. ([View Highlight](https://read.readwise.io/read/01gvx7s3gjd3bjw1e8mqh90s17)) > The government’s crisis managers tried desperately to eliminate incentives to run ([View Highlight](https://read.readwise.io/read/01gvx7ss9xr1kv0cf5pckczvc4)) > The conventional wisdom at the time, and still today, was that the government bailed out Wall Street while screwing Main Street. But the reason the government bailed out Wall Street was to prevent the banking crisis from turning into a second Great Depression that really would have screwed Main Street. The financial rescues of 2008 all helped stabilize the system; the fall of Lehman, which the government failed to rescue, is what nearly dragged the system into the abyss. ([View Highlight](https://read.readwise.io/read/01gvx7ta82x91bttbswc1mgwxb)) > And remember, the shareholders of all those failed firms were totally or virtually wiped out. The CEOs lost their jobs ([View Highlight](https://read.readwise.io/read/01gvx7ttgadvxk5nv5t417a4ev)) > The government put a lot of tax money at risk, but it all got paid back with interest ([View Highlight](https://read.readwise.io/read/01gvx7txyr0hj5eya0tnbgrexd)) > And under President Barack Obama, Washington passed a separate $800 billion economic stimulus bill for Main Street, another subject I’ve spent [too much time](https://www.amazon.com/New-Deal-Hidden-Story-Change/dp/1451642334) thinking about, that helped end the recession in a hurry. ([View Highlight](https://read.readwise.io/read/01gvx7vhbh2fs816atkkxm57bh)) > The mega-bailouts of 2008 did, in fact, protect some irresponsible financial gamblers from the consequences of their bad bets, which did, unavoidably, send a bad message about irresponsible gambling. That’s why Obama signed the Dodd-Frank financial-reform law in 2010, which essentially made the fire code much tougher and required more banklike firms to obey it ([View Highlight](https://read.readwise.io/read/01gvx7w679nbykvhb3qjqe46ha)) > Financial stability, unfortunately, tends to breed overconfidence. I must confess that in 2018 when President Donald Trump signed a bill relaxing Dodd-Frank’s oversight rules for SVB-size banks, I didn’t think it was a good idea, but I didn’t think it was a big deal, either. (Whoops.) ([View Highlight](https://read.readwise.io/read/01gvx7wsfav7xx2g2chmntdkgs)) > More oversight would have been better because SVB was a disaster waiting to happen—a bank with [*94 percent*](https://apnews.com/article/silicon-valley-bank-failure-deposits-fdic-8011ea377d8f9941032790ce1d704c5a) of its deposits uninsured, uniquely vulnerable to a run ([View Highlight](https://read.readwise.io/read/01gvx7yezq01jtwkzsae5zeyey)) > But SVB was a classic bank run, and a pretty obvious contagion risk for similarly sized banks, so the crisis managers basically followed the playbook from 2008. ([View Highlight](https://read.readwise.io/read/01gvx7zc1azywbxs5nq07ye3z5)) > When confidence goes, it goes fast. ([View Highlight](https://read.readwise.io/read/01gvx80aaemymnye16fhy1kbe4)) > But this was an unusual situation where the Federal Reserve, the FDIC, and the Treasury Department could act quickly and decisively without creating serious moral hazard ([View Highlight](https://read.readwise.io/read/01gvx80rrdszd4rh4g8wen1269)) > They [ousted](https://www.sfchronicle.com/bayarea/article/silicon-valley-bank-investors-executives-17836135.php) the SVB managers who got the world into this mess ([View Highlight](https://read.readwise.io/read/01gvx80vhedje3r4hdnhbv19h1)) > They let SVB’s shareholders lose all their equity ([View Highlight](https://read.readwise.io/read/01gvx80zeb2tere8cccv62e010)) > They didn’t even backstop all of SVB’s bondholders ([View Highlight](https://read.readwise.io/read/01gvx814cntmrhamc0vjvy75wf)) > But the government immediately made cheap liquidity widely available and guaranteed all of the uninsured deposits ([View Highlight](https://read.readwise.io/read/01gvx824bp5ffyxfnqfe2fp9xm)) > The thing is, bailing out depositors who happen to park their cash in the wrong bank doesn’t encourage risk taking ([View Highlight](https://read.readwise.io/read/01gvx82g6gn8x44zdrc8maz3vz)) > Parking cash in a bank is supposed to be the opposite of risk taking! ([View Highlight](https://read.readwise.io/read/01gvx82krgwmmpkhakb6zyfw41)) > Bailouts are inevitably suboptimal, and they inevitably make people mad ([View Highlight](https://read.readwise.io/read/01gvx82xj3chdv81xnf46s59rc)) > But continuing problems at First Republic Bank and a few other regional banks caught up in the frenzy suggest otherwise ([View Highlight](https://read.readwise.io/read/01gvx841y4h4q59ppwd5npnmfs)) > student loans, as burdensome as they might be, don’t have the potential to create global calamities when they don’t get paid back in full ([View Highlight](https://read.readwise.io/read/01gvx84xag43fq18mc7fshyjbt)) > As long as financial institutions borrow short and lend long, they will always be vulnerable to runs. And risk will always migrate to the path of least resistance, especially in times of stability, when the risk doesn’t seem that risky. ([View Highlight](https://read.readwise.io/read/01gvx86hsdgbqdkp7esy9dyw6d)) > We should have the humility to recognize we probably won’t anticipate where the next fire will start either ([View Highlight](https://read.readwise.io/read/01gvx86zxhv49tvkadfbmsvpa1))