The bailout was required to keep the financial system running which keeps literally everything else running. Supply chains would have broken down overnight without the availability of capital. If the major financial firms had shut down it would have had much worse effects than people losing their savings.
That's fine, there were other options, we could have bailed the banks out financially to keep the economic wheels turning, and convicted a few bank executives to send a message that there are real world consequences to a group who are far too comfortable with fines being the cost of doing business.
Too big to fail? Dubious, but ok.
Too big to jail? No. Throw a CEO behind bars and the finance industry keeps on going but it scares the shit out of others who would misbehave.
If we take the example of blending junk rated mortgage backed securities with AAA rated securities then selling the whole lot as AAA securities, fraud seems to be an obvious starting point.
What you describe is exactly the issue, because there's no "obvious fraud". You need to understand these instruments, simply:
Banks didn't deceptively mix mortgages (which isn't fraud, anyway) and sell them to unassuming buyers. They constructed portfolios of mortgages (assuredly some good, some bad), a third-party rated those new financial instruments as AAA without fully accounting for risks, and sophisticated buyers purchased those instruments, also without fully understanding the risks.
If anything, the blame should be on the pension funds and large institutions who purchased these things and who pay people large salaries to manage this money. But I have a hard time seeing fraud in this process.
I mean, you can read this in The Big Short. Characters like Michael Burry read the prospectus' for these securities and could see what was in them, thought much of it was crap, and made their investment decisions based on that. Anyone who purchased the instruments had the same opportunity, and in the case of pension funds the obligation to do so.
Everyone simply thought “real estate only goes up.” In valuing the mortgage, the credit worthiness of the borrower was secondary to the value of the home, and the data still bears out half the story. In rising real estate markets mortgages simply don’t default. Problem is, everyone forgot real estate can go down.
No bailout weren’t required. We shouldn’t have support their risky behavior by bailing them out. They and their counterparties deserved to lose their shirts. Instead the consumers who took did imprudent cash out refinances lost their shirts. Wall Street firms deserved the same fate for their bad choices, but instead Wall Street got nailed out.
and in its wake would be left space for more resilient structures to emerge.
i’m not saying “let it collapse”: a government has a duty to protect its own citizens of course. but i do think the myopic view which subsidizes a system once it becomes too big to fail runs counter to long-term prosperity by making the local optima more trapping than they would otherwise be.
It’s a myopic view to not throw supply chains into turmoil? This would be like letting your production service go down completely and instead of trying to bring it back up first you decide this is the perfect time to refactor it.
the myopic view: of or focusing on only the present. never did i say the antidote is to take a hyperopic view. obviously the appropriate view will lie somewhere in between. i even went out of my way to clarify that the extreme hyperopic view is not what i advocate (my second sentence). it's only my point that we leaned (continue to lean) further to the myopic direction because we don't really understand (or appreciate) the extent to which this impacts things over any other timescale.
