This is how capitalism is supposed to work. If a firm goes bankrupt, just let it fail. Might bring some short term pain, but it creates a healthier economy in the long run.
Bailouts are contrary to the spirit of capitalism.
Problem is, that was exactly what drove policy in the United States between 1929 and 1933.
In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later.
Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe.
There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008.
In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it."
Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.
> Problem is, that was exactly what drove policy in the United States between 1929 and 1933.
I don't understand how people think that the policy during 1929-1933 was "do nothing" when the following things occurred during that time period: Smoot-Hawley Tariff Act, Glass-Steagall Act, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation, the Hoover Dam(!), and more.
Despite Hoover stating that he wanted less government intervention, that isn't actually what happened. Basically, the notion that "we did nothing" during 1929-1933 (as you've suggested) is a giant misconception that really needs to die.
The Glass-Steagall Act, at least, what people mean when they say "Glass-Steagall" was passed in 1933 and signed by FDR.[0]
You are correct, of course that Hoover didn't "fiddle while Rome burned" but fiscal policy was largely non-interventionist and monetary policy tight until the Emergency Banking Act of 1933[1] which was the "severe government intervention" I mentioned in the OP.
The government heavily interfered in 1929 under President Herbert Hoover instead of taking the tact taken by President Harding in 1921 to cut the budget, fix taxes, and right the ship. You would think Hoover would have learned from Harding being his Secretary of Commerce, but he turned out to be an idiot and sent us into a tailspin that didn't get fixed until 1946.
Bernanke should have looked earlier and not to the policies of Hoover. I fear we will have the same continuing problem until we look to 1946 to get us out.
I am more thinking the drop in government spending from $84 billion in 1945 (big debt) to under $30 billion in 1946 (surplus) and the tax cuts from 1948. Rebuilding someone else is generally not seen as a plus to the overall economy.
>Rebuilding someone else is generally not seen as a plus to the overall economy.
Maybe at full employment it's not. In a country winding down production from WWII, rebuilding someone else is the best thing that could possibly happen to the economy.
Government production would down (thus the budget), but domestic production for domestic items kicked in pretty hard. You might want to check the labor statistics of the day.
WWII production did wind down, however, and had to be replaced. This was aided by paying US companies to rebuild Europe and Japan.
If Britain or France has come out of the war unscathed and been able to rebuild the rest of Europe, the postwar history of the United States would have been significantly different.
"This was aided by paying US companies to rebuild Europe and Japan."
How much money was spent on manufacturing here for both versus total GDP?
"If Britain or France has come out of the war unscathed and been able to rebuild the rest of Europe, the postwar history of the United States would have been significantly different."
The US would have still been fine and given the same policies minus the Marshall Plan, we would have had less government spending. Also, if the UK and France came out unscathed then the US would probably have not needed to enter the war in Europe.
That's not really true. Companies regulated under Solvency II will require sufficient capital to survive a 1 in 200 years worst case event. Sort of (but not really), 1 in 200 companies will face death-knell liquidity crisis every year.
The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it.
Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern.
What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
>What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
You make it sound like GM had no control over it. And that additionally, when a company goes bankrupt, all the wealth just disappears into thin air. Neither is true.
It does not disappear into thin air, in the same way the rubber from a burst balloon can still be used to tie your hair back (but not as severe, and the recovery rate might be as high as 60%, but I would suspect very, very much lower in the case of a fire-sale of GM's assets)
> The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it.
What's the alternative? Tax people and give their money to the aristocracy (because you just created one)?
I am certainly not aristocracy. The US government stepped in with temporary funding to stop GM going under. I stepped in later to replace that funding by buying some high risk equity (about enough to buy a used car-tyre). So did lots of other people. Luckily, I made a return for this investment (others, not so much).
You might call that crony capitalism. In non-western countries giving money to an official in return for favourable economic conditions is called a bribe, in the US, Canada and Europe it's called 'lobbying'.
The terms crony-capitalism, klepto-capitalism, and casino-capitalism are all very descriptive of the US economic system, which has become like a bad Yakov Smirnoff joke: "In America, bank robs you!"
So what's happened to the $85 billion a month ($1 trillion a year) that Ben Bernake has pumped into the banks in the last year, during the third round of quantitative easing (QE3)? "It all got bottled up in the banks, and essentially none of it ... got lent out." Source: http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-...
QE as any kind of remedy is a farce. At best it has a kind of placebo effect on the stock market. In reality, with QE the Fed exchanges reserve deposits for treasury securities to execute policy aimed at lowering longer term rates which is supposed to increase demand for loans. Those reserve deposits are not lent out because reserve deposits are never lent out. Reserve deposits are used for interbank settlement.
Bailouts are contrary to the spirit of capitalism.