More from our co-blogger Prof. Kyle about the Fed, and letting the banks fail (he's indisposed so I'm posting this for him):
Another thought on the Fed not letting the system melt down
There is a huge difference between saving the banks (and then breaking them up into smaller banks, if I had my way) and saving bank stockholders and management. In my opinion the crisis required the Fed to save the banks as institutions in order to prevent worldwide financial meltdown. That would have bought the time to reregulate and break them up (which didn't happen). But there was no need whatsoever to do it in a way that bailed out bank stockholders. They made their choices, lost, and if capitalism means anything they should have ended up selling apples on the corner. Management should have been fired, and the hogwash that only they had the rocket scientist smarts to figure out how to deal with the situation should have been ignored.
A bit of arithmetic illustrates the point. Citibank, at the time of the TARP, had a total market capitalization in the vicinity of $8 billion. The taxpayers put $40 billion into them. For that money we should have owned them lock stock and barrel 5 times over. At the time, Citi paid back the TARP loan and the government was bragging about how we MADE MONEY (I think our "profit" was 8%, but I might be wrong), but their market cap had risen to $120 billion. If the government had simply taken over and tossed the stockholders out like they should have done, we could then have sold the shares back into the market for a profit of 300% to the Treasury. And in the meantime we could, as owners, have fired whoever we wanted and then sold it back into the market in as many separate pieces as we liked. Instead, the taxpayers paid for a bailout of the stockholders and THEY got the profit, while the same inept managers continued to run the bank. THAT is the real problem, in my mind.
We are now set up with the same owners and the same managers with nearly the same laxity in regulation to do the same thing over again. Not only that, but they now have the experience of having no negative consequences for their behavior. Count on it, they are not reformed.
