In August of 2007, the financial crisis began to manifest itself. The fire started burning and then Treasury Secretary Hank Paulson tried to put it out with a program called TALF, Term Asset Backed Loan Facility. It was our first big mistake to the financial crisis.
Why? Because setting up this government program did nothing to change the economic incentives in place to stop the crisis. There was only one thing at this late date that could have avoided a bigger crisis the next year, failure. Bush wasn’t going to let that happen on his watch. So they put on a band aid.
The band aid lasted for about a year. Then, the full force of the out of control financial monster manifested itself. From 2000-2006, the Republicans didn’t reign in federal spending. That cost them the House of Representatives and Senate. The financial crisis was the nail in the coffin for the 2008 election.
In October of 2008, both parties voted overwhelmingly for TARP, the troubled asset relief program. That didn’t work either. Again, only failure cleanses the marketplace. Failure makes all the warts transparent. Failure makes equity investors and bond investors audit books in a search for cash and productive assets. Failure forces businesses to look at their operations and discard what doesn’t work and improve what does work. Allowing the banks to go bust at that time would have been painful. But allowing them to go bust would have been better than what happened instead.
What we got was more government programs in all kinds of forms to prop up a failed banking system. Another remedy is Dodd-Frank. Dodd-Frank will be the nail in the coffin of the US banking system as we know it. Small and medium sized banks will be forced out of business because of the costs. We will be left with big behemoths.
Remember when people Monday morning quarterbacked the issue of “too big to fail”, and “too much risk concentrated in too few hands”. The system we are developing enhances those risks like a weightlifter on steroids. There will be a point where the entire system will crack and it will be uglier than if we did nothing at all.