The financial system is quite tightly linked. Even the banks that didn't have the large amounts of toxic assets were affected by the financial crisis (from my understanding).

Worst case scenario is that the financial sector would have completely imploded, there would have been runs on banks almost no lending and jut a complete economic disaster. Basically all the major banks would have collapsed.

Best case scenario - a few more large banks collapse, eventually the sector pulls through and we are were we are now in five years time (and with the government not having given out a ridiculous amount of money in loans).

Actually some banks weren't effected that badly... and had loans forced upon them that they didn't want, because they didn't want people knowing which banks were the good ones and which were the bad ones.  Or so i've read.

Additionally, a bunch of local level banks popped up... there were plenty of people willing to jump in the place of the big banks when confidence in them waverd.

Had a lot of the big banks fallen... it seems a lot of small local banks would of taken their place.

"Had a lot of the big banks fallen... it seems a lot of small local banks would of taken their place."

But if people think the new ones would have just slid into place without massive repercussions to the economy from the destruction of the old -- and I'm not saying you do -- they're deluding themselves.

Final-Fan:

I don't think anyone, including myself, believe that if we would have let things slide, things would have been fine. We would of had a very rough time of it. However, given the data we've seen even though we helped the banks out, it's unlikely that outcome would have been overall worse.

The problem with the solution we took was that:

- We didn't have the money. We printed the money to give to the banks, which is devaluating our dollar causing inflation (thus hurting everyone)
- The money wasn't used properly. See banker bonuses. I really wonder that of the $700 billion spent, what actually went to salvaging banks that would have went insolvent.

The banker bonuses thing has actually been blown out of proportion. Sure it looks bad and isn't good, but the money given in bonuses is minuscule compared to the amount loaned to the banks.

And yes, there are massive economic repercussions of giving out these massive loans. Personally I'm of the view that it would likely have been much worse if these loans hadn't been given out.

mrstickball: so --just double checking -- you're saying that if the government had simply allowed the banks to fail (and the smaller banks would rise from the ashes), the consequences of that situation would be as good as or better than (or, if you prefer, as bad as or less bad than) the consequences of the government intervention that in fact took place?

The bonuses are not a minuscule amount of money. Take Goldman Sachs alone:

http://dealbook.blogs.nytimes.com/2009/10/16/bonuses-put-goldman-in-public-relations-bind/

There alone you have several billions in bonuses in a single year, for a single bank.

There's also the fundamental question of allowing bailed out firms which threatened to destroy the economy to be awarded for their behavior.  It all smacks of financial terrorism, and a lot of governments are willing to go along.

The consequence of government intervention has been to allow banks to hide their problematic assets (which can be seen every time one more bank fails, their assets turn out to be marked 30-50% above their true value). So far I haven't seen any evidence that government intervention made the financial system inherently stable and sustainable. Instead some of the bad debt gets shifted to the taxpayers, and business as usual continues.

So the positive consequences may be few or none in the long term, while the negative consequences are that the bad lending practices are still allowed to continue. For example, instead of banks taking the risk from subprime loans, now you have the government (through the FHA) backing loans which require 3% downpayments or less.

http://www.msnbc.msn.com/id/27844894/

Then are other negative consequences like moral hazard (what's to stop the banks from doing the same again in the future?), and the high possibility that trying to reinflate the housing bubbles will result in an equal collapse down the road...

Bad things would of happened... but not that much worse if you ask me.

I mean, the biggest fear people had was that poor people wouldn't be able to get loans.  That pretty much happened anyway.  Loans almost completly dried up for average people... outside of your smaller banks, more stable chains and the usual "Cash Advance" places that makes money hand over fist.  Or at least that was the case by me.

All that bailout money, the government probably could of made it's own bank to bailout people and provide non-profit loans to people for a few years until new banks took the place of old ones if it wanted to.

I believe that had the government not bailed the banks out at the first sight of problems, it would have been better in the end.

As NJ5 said, the banks inflated assets. You don't fix that problem by bailing them out, you fix them by letting them be purchased at what they are worth.

Had the banks been let to fall, the government then could have gone in, and ensured that credit could have flowed, and then helped the banks at discount rates which did not happen. How much would the government have paid to bail the banks out 3 months later? 6 months later? I am going to go out on a ledge and say 'hundreds of billions'. If the government wanted to bail the banks out, that's fine. However, I believe they did it at a very 'safe' time of ensuring they helped everyone, but paid a huge fiscal cost to do it.