It is important to consider that better part of the decade preceding 2008 was consumed by building a housing bubble. Politicians demanded banks ease lending standards to artificially increase home ownership. Seeing this, Americans — of all income levels — bought homes they couldn’t afford. Finally, Wall Street bet on the success of these mortgages, using financial instruments called mortgage-backed securities. Everyone in society — government, Wall Street and Main Street — screwed up to make 2008 an epic bubble that burst.

So why do we care if Citibank fails? Normally, market failure presupposes that an institution failing won’t destroy the entire system. However, the problem in 2008, and today, is that large financial institutions were responsible for lending more than half the amount of our economy’s gross national product. Because businesses cannot function without credit, a failed banking system would have caused the entire economy to slow.

Just the thought of the big banks failing caused panic in the United States and around the world. The American economy shrank at an astounding 8.9 percent in the last quarter of 2008. There hasn’t been a quarterly decline of that magnitude since the Great Depression.

The same is the case with providing assistance to the auto companies. For the record, there is no one with less sympathy for the American auto industry than myself. Empirical evidence is clear that before General Motors Co. and Chrysler went into bankruptcy, most American cars were functionally inferior to those produced by their foreign competitors.

Had normal market conditions existed at the time, the arguments for a privately managed bankruptcy would have been desirable. But again, the impact of their failure and terrible timing gave the government no choice but to provide them assistance.

The credit markets were frozen during the crisis of 2008 at the very same time automakers were falling over a cliff, making privately managed bankruptcy nearly impossible. Even if privately managed bankruptcy was possible, it would have been a disaster. History shows bankruptcy for large companies take years to sort out. Announcing partial liquidation and stalled restructuring of GM and Chrysler immediately would have put millions of autoworkers, suppliers and connected industries out of business.

Our government couldn’t have allowed that kind of panic in the middle of a financial crisis.
Accordingly, the federal government had no choice but to take extraordinary actions. And to their credit, they didn’t do a half bad job. Since then, financial institutions receiving Troubled Asset Relief Program, or TARP, funds have paid back the U.S. Treasury. Also, the federal government moved Chrysler and GM through an expedited emergency bankruptcy process. Like any private-equity company, the federal government restructured both companies to have far stronger business models.

Independent Wall Street analysts estimate that of the $82 billion in TARP funds used to bailout GM and Chrysler, taxpayers will never get about $20 billion back. But in all honesty, that’s not that bad — the interest paid back by the banks receiving TARP money more than covers that cost.

In my mind, the argument should not be whether our government should have bailed out large companies in the middle of a financial crisis. Ample evidence suggests that we could have easily slipped into a depression if these unpopular and expensive actions were not taken. The more important policy debate in this upcoming presidential election should be how to provide effective regulatory mechanisms to never allow the panic of 2008 to ever happen again.

Ameek Singh is a State News guest columnist and international relations and political theory and constitutional democracy senior. Reach him at sodhiame@msu.edu.