Sunday, October 23, 2011


Excessive debt plagues the global economy today. The entire world gorged on easy money during the credit boom and now we need to decide who bears the losses from the debt-binge. The answer is both morally and economically simple: creditors and banks that make ill-advised loans must face the pain of bad loans. This simple answer means they will exercise more caution in future lending decisions and that they get only the protection they bargained-for. If they wanted the maximum safety they should have lent to the U.S. government or Japan or Germany. Instead, they chased higher-yields, and made subprime real estate loans or lent to Greece or made risky bets on derivatives.

Under no circumstances should they be permitted to have their cake and eat it too--they cannot pocket the profits of risky banking and lending and now obtain unbargained-for guarantees from governments around the world. This is the fundamental economic injustice in the world today because while 99% of the innocent taxpayers bear the costs of the debt bubble, the 1% who profited most continue to control our financial system and continue to enjoy windfall profits from the bailouts arranged by their pals in government (in the US that means both major parties). Worse yet, much of the bailout money ended up in the pockets of the very managers that caused the crisis. The government expended trillions to bailout financial elites, including extended stealth bailouts, that continue through today. Indeed, the government even bailed the bankers out of jail and now intends to bail them out of their ongoing foreclosure fraud.

Meanwhile, in Europe the banks remain under-capitalized. Another round of bailouts is looming over there, and it threatens to engulf the US banks. The Europeans preach austerity to their people at the same time they seek more money for their banks from the US-supported IMF. If the European banks go down, the US banks will follow according to a recent US government report showing that our banks have at least $2 trillion in total European exposure. As Paul Krugman notes today the Europeans probably can only continue to argue about the placement of deck chairs on the Titanic, not save their banks. Meltdown looms and it may be worse than Lehman.

Instead of using US taxpayer money to bailout global banks, Occupy Wall Street should demand that the government bailout US citizens. Student loan debt soared and jobs contracted since the crisis and the government should reduce loan balances and defer payment in exchange for community service. Foreclosed homes should be available for rent by current occupants so that the supply of real estate for sale contracts and poverty is reduced. Finally, and most importantly, the US needs a jobs program (including massive grants for education and retraining) to rescue citizens from a financial crisis that is not of their making.

As for the financial sector, they must be allowed to fail this time, finally. All the senior managers should lose their jobs, be sued for gross negligence and face criminal penalties (in many cases, at least). Their employment agreements and deferred compensation would be terminated along with the rights of all unsecured creditors. This is the approach of the new Dodd-Frank law, if the administration follows that approach. Notably, this process includes debt destruction--that is, creditors will take losses and be forced to write-off debts which will facilitate deleveraging.

As many economists pointed out early on, rescuing the banks will not spur new lending. Only a bank with competent management and a clean balance sheet can do that. So, the government should seek to move good assets into new banks with competent managers as quickly as possibly. This will create conditions for renewed growth.

Occupy Wall Street should focus on this: Bailout people not banks!


  1. Amazing post. This all sounds like realistic, common-sense solution to the terrible economic state the world finds itself in. How do you get this message to Occupy Wall Street and the Obama administration?

  2. Steve Newbold writes:

    Great post. The bailing out of banks cannot be understated or talked about enough. If there is one thing that those from all ideologies can (or at least should) unite against, it is corporate welfare. In my opinion, other than the illegal wars supposedly waged on "terrorism" the greatest crimes, decade after decade are the bailing out the banks.

    And it aint just under Obama's watch. There are bailouts virtually every presidency including Both Bush's and Reagan as well. It doesn't matter the party, the end result lets us know who is really in charge.

    To me the question isn't "should we bail out the banks?" The question is "are the banks in charge or are our 'elected officials' in charge?"

    I'm of the opinion that we are a facist regime acting under the color of a republic and that Obama has come to realize his job is to do nothing more than continue the Bush policies.

  3. Andrew H - Memphis LawNovember 20, 2011 at 8:32 PM

    While I can agree with the sentiment that banks (and corporations) should not be bailed out because of their past mistakes, I cannot agree that individual people should be bailed out too.

    The economic downturn has hurt a lot of people, but is bailing out individuals really the solution? Tough breaks happen to people all of the time; I'm not sure a downtrodden economy is sufficient to authorize millions (more?) of tax dollars to help out Average Joe and Jane.

    Whatever happened to bailing out oneself? Using hard work, a little luck, and bettering oneself everyday to turn around misfortunes?

    The federal government should concentrate on revitalizing this economy, and stop bailing out banks and corporations. Stricter regulations of banks and corporations will prevent this fiascoes from reoccurring down the line instead of allowing them to run roughshod with reckless investments.

    America did it once before, it can do it again. It's time for corporations and banks to face the fate they've created for themselves.

  4. NatalieB_MemphisLawNovember 23, 2011 at 6:03 PM

    I do not think individuals should be bailed out through automatic balance reductions, but I do think the government should help those who already have debt secure opportunities to reduce it. Everyone in this country should know that when they take out a loan, they have to pay it back. If the government simply bails out those who have already put themselves in debt, it will only encourage people to get loans without the expectation of paying them back in full. Instead of bailing people out without them working for debt indemnification, we should help to facilitate people bailing themselves out through programs like the job program you suggest. I also agree with your idea of community service in exchange for a reduced balance; anything that would require people to actively work toward their debt reduction would likely not have the effect of encouraging people to take out loans they cannot pay back. We should also take preventative measures so that those who would normally take out loans do not have to do so or do not have to borrow as much money; lowering the price of tuition at state schools would make eduction, something many people see as necessary, attainable without requiring people to borrow as much money.

  5. Brigid W (Memphis Law)
    The problem with making that the focus of the OWS movement is that America already did it, and we can't take it back. I would argue that the focus of OWS should be on electing new leadership in D.C. that would work with those in the movement to write legislation removing the tax expenditures which benefit the "1%" and work on a better regulatory scheme to hold big business and the "too big to fail" banks accountable in the future. I would hope that after seeing the ineffectiveness of the original American bailout of the banks and the subsequent similar action in Europe politicians in both parties (which are basically the same nowadays) will realize that that money doesn't "trickle down." It is hoarded by the so-called job creators who do nothing for Main Street.

  6. Some years ago, Japan regulated banks lending policies. The result was that the Japanese people lived in smaller homes ... and oh yeah they overtook Great Britan as the world's second largest economy, until the formation of the European Union. Japan remains the world's third largest economy behind the U.S. and the European Union. Here's to hoping that China doesn't figure out the right blend of capitalism and regulation before we remember that it was common sense regulation, an otherwise free market stacked with work ethic, and democratic ideals that put our economy on top.

  7. Anytime Paul Krugman is quoted it usually polarizes me. That said, I was able to finish the entire post. However, I can really only agree with about half of it.

    The Federal government should not have bailed out major banks that, on their own fault, failed. I believe the OWS movement has highlighted how the bailout process did little more than protect the ultra rich that made extremely poor decision.

    However, I cannot support the Federal government spending any more money on a so called "jobs plan" or "struggling" individuals for two main reasons. First, the federal government is completely inept. Any plan that supposedly would be positive for the guys on the low end of the totem pole would not be implemented to actually yield a worth wild gain. The Federal government does not invest properly in infrastructure and instead pursues labor expenses. Labor expenses are unsustainable and do not produce long term growth. Second, there is no revenue for bailouts anyway. Where is the revenue going to come from to bailout individuals (who have usually made bad decisions themselves)? Without a deficit free spending model I cannot support bailouts of any kind.

  8. Lindsey G (Memphis Law)November 28, 2011 at 8:01 PM

    I completely agree with Brigid that the OWS movement should focus on electing responsible, accountable individuals who are genuinely concerned with the majority of America, not those who are “in bed” with CEOs and major corporations. Unfortunately, it is the same CEOs and corporations that give major funding to politicians on both sides. Until there is legitimate campaign finance reform I remain pessimistic about the prospect of individuals that run this country.

  9. Franklin A (Memphis Law)November 28, 2011 at 9:47 PM

    I think Josh made a good point about infrastructure. American infrastructure in many respect is old and in need of repair or even redevelopment. Investing in this area would certainly pump money and jobs into the construction industry providing many average Americans with steady work and something all Americans can benefit from in some respect.

  10. Salwa (Memphis Law)November 29, 2011 at 4:40 AM

    As much as I agree that individuals should be the ones bailed out, I am having trouble seeing how that would ever help our economy. Forgiving current debt, or bailing some individuals out, would only discourage future borrowers/individuals from paying back.

  11. Gray N. Memphis LawNovember 29, 2011 at 9:23 AM

    I agree that the banks absolutely should not have been bailed out of their bad decisions. Some of the poor decisions that banks and other financial institutions made prior to the crisis of 2008 are almost akin to a person walking into a casino and betting their whole life savings on one blackjack hand. Sure the potential profits would be unbelievable if you win the hand, but the potential losses would be devastating. The person who loses his life savings on the blackjack bet will not be bailed out by the casino for his/her loss so why should our government bail out irresponsible, and at times illegal, investment activities by our nations' banks?

  12. Bailing-out taxpayers is just another name for a tax cut. I think that with the huge national deficit, such a plan would be imprudent. In the long run, bailing-out the "too big to fail" banks may prove to be imprudent as well, but, as Brigid says above, this bailout is already done. It is time to focus on changing Washington to insure a better future, not settling scores from the past.