What We Should Have Done With The Banks (Hint: It Isn't Letting Them Collapse)

There are still people suggesting we should have let more banks collapse, apparently rekindled by discussions of Wall Street bonuses totaling more than the annual pay of all minimum wage workers.

Per Hyman Minsky in "Stabilizing an Unstable Economy",

"There is no possibility that we can ever set things right once and for all; instability, put to rest by one set of reforms will, after time, emerge in a new guise."

And that applies to letting the free market wipe out banks rather than bailing them out as well. The utility of allowing such a collapse is minimal. After time, a way will be found to once again believe in risky investments and instability will reform, no matter how many banks were allowed to fail. Meanwhile, the harm of such a collapse is significant, as a bank's customers (including businesses with otherwise profitable models) experience financing shortfalls through no fault of their own when that bank goes belly up. And those innocent customers are often themselves wrongfully driven into failure by the failure of the bank. And that means lots of layoffs of otherwise productive workers, massive suffering on account of letting banks collapse.

We arguably should have required that in each bank to be bailed out all the major executives must be fired and thoroughly investigated ... as a condition of the bailout. That was the job that should have been done but wasn't.

Doing the Math on the Auto-Bailout

ABC news June, 2011 estimate of how much the auto bailout will have cost after they finish selling the shares: c. $14 billion. Low-ball estimates figure 1,000,000 jobs that would have evaporated without the bailout. Many estimates, such as that from the Center for Automotive Research, figure significantly more than a million. So at $14 billion for 1 million jobs, that's about $14,000 per job that -- thanks to the auto industry rescue -- didn't evaporate overnight.

Consider how much the unemployment and other consequences would have cost us if we hadn't prevented those job losses. Obviously there'd be unemployment checks. Also food assistance and probably medicaid. Then there'd be the lost revenue from not having those jobs to tax. Any guess as to how much we collect from auto-industry worker income taxes in a year?

Odds are pretty darn good it was a bargain, even just considering the cost over one year of all those lost jobs ... and a good many of 'em would likely have been unemployed longer than a year.

Multiply the average weekly unemployment benefit by the average duration of getting unemployment and -- even assuming that adding another million to the unemployed wouldn't up the average, you get a cost of almost $12 billion. Since at least a million workers would have lost their jobs if GM and Chrysler had collapsed, we can figure that unemployment alone would have cost at least that much.

So, that'd leave us just $2 billion to account for from the estimated cost of rescuing the auto industry. $2,000 per worker. So for the bailout to have not saved us money, the combination of what we collect from the average one of those workers in annual income tax plus what it would have cost in food/medical assistance would have had to have been less than $2,000. That seems very unlikely. It's implausible that our costs wouldn't have increased beyond what the bailout cost us if we had not implemented the bailout.

That's even before considering the economic ramifications of all those lost paychecks decimating consumer spending and demolishing what was left of the already crippled housing market.