What We Should Have Done Instead of the Bailouts

Great analysis by Barry Ritholtz of how things would have turned out if we had taken an alternative approach to the bailouts and stimulus: if we had chosen the path of Sweden (which dealt with the problem) rather than Japan (which papered it over).

He is responding to Geithner's self-congratulatory op-ed in the NYT, referring to a Blinder/Zandi report on how much worse it might have been had we done nothing in 2008.  Barry says the proper comparison is not with doing nothing, but with doing something smarter than pouring money on the problem. 

Any counter-factual like this hypothetical, since we cannot replay the real world, but is useful to compare alternative policy approaches for future action. Barry uses analysis from David Weidner in the WSJ and David Leonhardt in the NYT to build the capitalist alternative to the socialist bailout:

• Bear Stearns: let it fall (it likely would have been bought by JP Morgan, as it was anyway, due to JP holding $9T of derivatives from Bear, but without a $29B government gift)
• Lehman: prepackage its restructuring, a point I have made previously
• AIG: carve the derivatives business out, rather than bailing out Goldman Sachs 100%
• Fannie/Freddie: wind down, before shoveling untold $Bs back in
• Insolvent banks: put them in receivership, clean them up, let shareholders/bondholders not taxpayers take the hit

Barry concludes we would have ended up with a functioning banking sector, a much healthier housing sector, smaller deficits, and a return of moral hazard. 

Comments

[Daniel - Taz]

Here in OZ we may have seen a top today. Quite some bullish commentary yesterday. Banks are really struggling. And the market is around the 50% retracement level which should pressure the market if my call of a diametric ending on August 10 prove correct. Seeing a lot of nice action ex BHP in the commodity stocks which are always late to the party. and talk of a new M&A cycle following the BHP bid for Potash. And no evidence yet of a reversal in US treasuries which bodes ill for the market in general.

[Michael]

Your comment that commodity stocks are "always late to the party" couldn't be more false.

[Daniel - Taz]

OK let me rephrase: commodity tend to outperform in the last throes of a rally.

[Wave Rust]

For me, the counter-factual is: what if we had a banking system, structured and monitored like Canada?

i know its a nonsequitor.

wave rust

[Account Deleted]

Dow Jones Futures before opening bell
http://niftychartsandpatterns.blogspot.com/2010/08/dow-jones-futures-before-opening-bell_18.html

[Wave Rust]

to all readers who trade for a living, are you long the indices for this short term trade (7-10 days)?

imo, you should be. you'll hate yourself if you aren't. the speed will rise quickly.

don't try to be cute if you aren't any good at scalping.

spx could be near 1175 by Friday or Monday.

fwiw, my sell on the treasuries still stands.

wave rust

[Mamma Boom Boom]

>What We Should Have Done Instead of the Bailouts<

I've always thought that Bush screwed the whole thing up. There should never have been any discussion of bailouts, we already had all the laws needed to handle the situation. We had the bankruptcy courts for the Wall Street firms, and the FDIC for the banks. The system was in place.

[Mamma Boom Boom]

>to all readers who trade for a living, are you long the indices for this short term trade (7-10 days)?imo, you should be. you'll hate yourself if you aren't. the speed will rise quickly.<

Anything is possible, but I say we head down.