Thoughts of the Wall Street Bailouts

• From a Libertarian perspective, the bailouts were entirely unconscionable — normally, Libertarians argue against taxing people even to feed the poor.  The bailout was widely perceived as taxing people and giving the money to the rich.
• The event was widely distorted by leftists as being much worse that it was.  Michael Moore, for example, in his movie “Capitalism: A Love Story”, claimed that there really was no financial crisis, the bailout was completely unnecessary, and the perception of a financial crisis was a hoax perpetrated by George W. Bush in order to steal government dollars.  Of course, the movie never mentions that most of the big banks had paid back their TARP money with a profit before his movie made it to theaters.
• The fact that all the big banks paid back the money they had received, with a profit for the government, very quickly, went almost completely unreported by the press.  At least 80% of American voters believe the bank bailouts were a gift rather than a loan
• There is a widespread perception of criminality on the part of the Wall Street banks.  Most people don’t understand finance well enough to articulate accusations of specific criminal activity — they have no idea what happened, but they are sure it was something morally wrong.
• A widespread perception of immoral behavior at the top has terrible consequences for society.  If young people are raised believing that the system is profoundly unjust and that the rich got that way by skulduggery, they are unlikely to apply themselves to the productive process.  They are unlikely to major in difficult subjects that provide marketable skills, they are unlikely to be willing to work long hours.
• In her book, Sheila Bair, the head of the FDIC, claims that, while the Dodd-Frank reforms were being drafted, she was trying to oppose any possibility of future bailouts, while Tim Geithner (then secretary of the treasury), who was running the show, was doing everything he could to set up the system so that future bailouts would be possible.
• Many people talk about “Moral Hazard” in that, in the future, banks will behave irresponsibly and take inappropriate risks because they’re confident the government will bail them out if they get ih trouble.

Bailing Out the Homeowners

One argument is that since we bailed out the big banks, we should be willing to also bail out people, i.e. the home owners.  Firstly, I’m not keen on bailing out ANYBODY, but let’s explore the idea a bit.  Most of the big banks paid back their bailout loans within 9 months.  An underwater home owner would take years to pay back a loan for the amount they are underwater, so bailing them out would be very different.
One consequence of the housing crash is that many home owners wound up with massive negative equity in their homes, and then they lost their jobs due to the recession, and because they can’t sell their house for enough to pay off their loan, they can’t relocate for employment reasons.
One thing the government could do, at no cost to the taxpayer, is create a class of loan called “negative equity unsecured loan”.  If someone has negative equity in their house and doesn’t want to declare bankruptcy or be foreclosed upon, make it possible to take out a loan for the amount they’re in the hole that would, like a student loan, be unsecured by any collateral and impossible to wipe out through bankruptcy.  The interest rates on these loans would probably be similar to those on student loans — higher than mortgage loans due the absence of collateral, but much, much lower than credit card debt due to the unavailability of bankruptcy.  Then people could sell their houses, relocate to where the jobs are, and resume paying taxes and paying off their debts.