Fallout: The Financial Crisis

Lessons learned from the bank bailouts

Marketplace Staff Aug 27, 2009
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Fallout: The Financial Crisis

Lessons learned from the bank bailouts

Marketplace Staff Aug 27, 2009
HTML EMBED:
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TEXT OF INTERVIEW

Steve Chiotakis: Even despite yesterday’s ho-hum day of trading, we’ve seen the markets in bull territory lately. And it seems like the big banks are recovering too with stocks trading higher and bank bailout money being paid back. But are they really doing better? Or is there still much work to be done? Marketplace Economics correspondent Chris Farrell joins us this morning to talk about how the banks are doing. Good morning Chris.

Chris Farrell: Good morning.

Chiotakis: Bottom line, were the bailouts a good idea?

Farrell: I think the bailouts were a good idea. And we’re talking about bailing out Bank of America, Wells Fargo, Citigroup. I mean Citigroup, it was practically on its deathbed and now the government has what? $11 billion paper profit on that investment.

Chiotakis: But it’s $11 billion in paper, right? So the government can’t really do anything about it, like say cash in because the rest of the shares would tank? I mean what does it do in the meantime?

Farrell: You know I think Citi is really a metaphor for the whole economy and the whole bailout. If you go back a year ago, we were staring at the abyss. And the government came in and bought a 34 percent stake in Citi. Now, just like the economy is turning around, so is Citigroup. But we’re not going to be reaping gains anytime soon. There’s still a lot of problems at Citi. There’s still a lot of toxic assets.

Chiotakis: So broadening this a little bit to the other big banks, I mean these are the very people that caused the problem in the first place. They’re bailed out because of big risks. What kind of lesson do they learn if the government, i.e. you and I and everyone else here, come to their rescue every time?

Farrell: OK, there’s several lessons. First lesson is: On the fly, the bailouts work. Second lesson is: Eventually the banks in Wall Street learned a lesson; take big risks, the government will bail us out. Therefore, here’s our third lesson: Regulators, Obama administration, Congress — you have to change the rules of the game. Otherwise we’re going to be back in the same situation we were before. Maybe it might take five years, maybe it might take 10 years, but that’s the risk.

Chiotakis: And all that notwithstanding Chris, do we have a way to see this coming next time? Sort of a reliable gauge?

Farrell: Bubbles are embedded in capitalism. They’re embedded in the optimism of capitalism. If you look back to our history since 1825 we’ve been having bubbles since that period of time. We actually had bubbles long before then, but that’s really when the industrial economy — the sort of business cycle that we are now familiar with — took off. Since that period of time, bubbles have happened. Bubbles will happen in the future. That’s the warning sign.

Chiotakis: All right. Economics correspondent Chris Farrell joining us. Chris, thanks.

Farrell: Thanks.

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