Bank bailouts after the 2008 Depression – the short and long-term benefits and limitations
|💵 Finance, Economic Inequality, Tax, Unemployment, 💰 Capitalism
Table of Contents
This paper examined the benefits and limitations of the bank bailout in the U.S. after the 2008 financial crisis. The examined benefits and limitations included both the short-term and the long-term. Among the short and long-term benefits of the bailout included the improvement of liquidity, the profits from the repayments, and the stimulated economy that would reduce unemployment in the long run. On the other hand, the short and long-term limitations of the bailout included the high inflation rates, the potential rise of risky behaviors among the banks, and the negative effects of the high public debt to the U.S. economy.
The bailout of the American banks became necessary after the severe Economic Depression of 2008 rendered most financial institutions almost bankrupt. At the aftermath of the 2008 Depression, the U.S. Treasury expended nearly $700 billion to revive the U.S. financial system (Fleckenstein & Task, 2009). The $700 billion was used to support the banks through direct cash supplies and the capitalization of mortgage-backed securities. The targeted purchase of assets and the direct capitalization of the U.S. financial system would present both the short term and the long term merits and limitations.
Short-term and Long-term Advantages of the Bailout
In the short-term, the bailouts to the banks restored liquidity to the U.S. financial system. After the 2008 Depression, financial institutions including banks and insurance firms hoarded money; thus, customers were unable to access cash (Schade, 2016). In November 2008, individual depositors could only withdraw amounts not exceeding $100000 daily from the Bank of American and Morgan Stanley. After the bailout, the withdrawal limits in the two banks were extended to $2 million and $1.5 million respectively (Schade, 2016). Thus, the bailout improved liquidity.
In the short terms, the bailouts were also advantageous in profiting the American taxpayers. In the first six months of the bailout program, the U.S. Treasury expended $622.5 billion to the banks (Navarro, 2012). One year after the bailout, the banks paid back $708.3 billion to the Treasury as repayments, interests, and dividends. Thus, the American public made approximately $80 billion as short-term profit from the bailout.
In the long term, the bailout was advantageous in stimulating the U.S. economy. The bankruptcy of the large financial institutions in any nation could be catastrophic to the economy. Thus, the future prosperity of the U.S. economy depended on preventing its financial systems from shutting down. In particular, the unemployment rates in the U.S. would rise drastically if the financial institutions closed operations after the 2008 Depression.
Five years after the bailouts, beneficiaries including the General Motors had increased their sales. In mid-2008, General Motors sold approximately 8 million cars and trucks. In 2013, General Motors had increased its sales to 12 million units annually (Schade, 2016). The increased productivity within the bailed out institutions ushered in high employment rates; hence, resolving the labor issues in the U.S. economy (Navarro, 2012). The sustained productivities of the supported institutions will keep the unemployment rates in the U.S. low for the long-term.
Short-term and Long-term Disadvantages
In the short-term, the bailout program proved costly to the U.S. taxpayers. The $700 billion bailout package represented 5% of the U.S. GDP (Schade, 2016). Technically, the bailout was equated to $5,000 for every taxpayer in the United States. Should all the financial institutions fail to reimburse the $700 billion, the U.S. Government will be forced to increase its tax rates to cover for the defaults (Navarro, 2012). Consequently, the high taxation would transition to high inflation rates in the U.S.
In the long-term, the bailouts were not only unfair to the taxpayers but bailing out banks could increase unethical and risky behavior in the financial system (Fleckenstein & Task, 2009). The bailouts sent the message that financial institutions could take risks, as long as the government is available to rescue them from bankruptcy.
The risky financial behaviors occasioned by the bailouts could make the economic depression a recurrent problem in the U.S. economy; hence, obliging the taxpayers to perpetually bear to burden of the moral hazard in the U.S. financial industry.
Also, the bailouts could increase the U.S. public debt significantly. In 2009, the U.S. public debt already stood at $9.4 trillion (Fleckenstein & Task, 2009). Increasing the public debt because of the defaults in the bailout program would mean that the American taxpayers must pay for the debt probably for generations into the future (Schade, 2016). It is more worrying that the U.S. may be forced to turn to China for more borrowing because no other governments besides the Chinese would be willing to purchase expensive U.S. Treasury Bonds. In the long-term, heavy indebtedness to China would threaten the stability of the American democracy, bearing in mind that China is the largest Communist state in the world.
- Fleckenstein, B & Task, A. (2009). Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. New York: John Wiley & Sons
- Navarro, A. (2012). Global Capitalist Crisis and the Second Great Depression: Egalitarian Systemic Models for Change. London: Lexington Books
- Schade, K. (2016). The Value Impact of Bank Bailouts during the Financial Crisis of 2008. Berlin: Nomos Verlag Press