Government Bailouts: A U.S. Tradition Dating to Hamilton

[bart]

Government Bailouts: A U.S. Tradition Dating to Hamilton


The bubble pops. Lenders freeze. Depositors lose faith. Panic spreads. And the government steps in because nobody else will.
Today it is Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke putting together the rescue package for a financial system rocked by falling home prices and a wave of defaults on subprime mortgages.




But a short walk through U.S. history demonstrates the point made by Alex J. Pollock of the American Enterprise Institute: "If you would like an empirical law of government behavior, it is that in a panic or threatened financial collapse, governments intervene -- every government, every party, every country, every time." The Panic of 1792

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Continues at: http://online.wsj.com/article/SB1221...cle-outset-box

[c1ue]

Re: Government Bailouts: A U.S. Tradition Dating to Hamilton

There have been plenty of panics before.

But all of the previous American panics were internal.

This time, there are outsiders involved.

Perhaps that will make some difference...

[bart]

Re: Government Bailouts: A U.S. Tradition Dating to Hamilton

Indeed... it's a globalized world.

The $160 billion swap line injection by the Fed last week was accompanied by similar responses from the ECB, BoJ, SNB, BoE, etc.
http://www.federalreserve.gov/newsev.../20080918a.htm

[grapejelly]

Re: Government Bailouts: A U.S. Tradition Dating to Hamilton

There have been plenty of panics before.

But all of the previous American panics were internal.

This time, there are outsiders involved.

Perhaps that will make some difference...

no that isn't true at all. Virtually all the panics that happened in the past US history were global. Really no big difference.

For instance, the Panic of 1873 ushered in a depression that rivaled the Great Depression and was worse in some parts of the world. And it was precipitated as were most panics by foreign money being pulled out of the US, in this case due to a crash on the Vienna stock exchange.

For much of its history, the US was a huge recipient of world investment money and when something went wrong, that money was pulled out and that is often what precipitated or coincided with "panics" recessions and depressions.

[c1ue]

Re: Government Bailouts: A U.S. Tradition Dating to Hamilton

no that isn't true at all. Virtually all the panics that happened in the past US history were global. Really no big difference.

For instance, the Panic of 1873 ushered in a depression that rivaled the Great Depression and was worse in some parts of the world. And it was precipitated as were most panics by foreign money being pulled out of the US, in this case due to a crash on the Vienna stock exchange.

For much of its history, the US was a huge recipient of world investment money and when something went wrong, that money was pulled out and that is often what precipitated or coincided with "panics" recessions and depressions.

There is one big difference: All of the past panics were with a currency with the gold standard.

Another big difference: The US was not a currency account deficit nation. Nor a budget deficit nation. Nor a net debtor.

A third difference: For most of the US' history, most people were farmers. Money or not was not strictly necessary to get by.

These three things make this time different in my view - but of course how different is the question.

[D-Mack]

Re: Government Bailouts: A U.S. Tradition Dating to Hamilton

Looks like Britain had some events leading to no bailout, but also smaller ones with a bailout due to well connected people.

The wrong rescues
by Martin Hutchinson September 19, 2008

....

In a pure capitalist system there would be no state bailouts – so much is obvious. There would also be a very small state sector, so little temptation for such bailouts, and a highly competitive financial system in which no one institution could grow dominant. In the 19th century British economy, for example, Pole, Thornton, a private London-based bank taking deposits from wealthy individuals and from country bankers went bankrupt in 1825. Since it was among the largest banks of its day, this caused considerable disruption, but there was no question of a bailout.

Indeed, only a few months earlier, at the peak of the 1825 speculative bubble the prime minister Robert, Lord Liverpool had opined on the subject of bailouts in the House of Lords “I wish it however to be clearly understood, that those who now engage in Joint- Stock Companies, or other enterprises, enter on those speculations at their peril and risk. I think it my duty to declare, that I never will advise the introduction of any bill for their relief; on the contrary, if such a measure is proposed, I will oppose it, and I hope that Parliament will resist any measure of the kind.”

Similarly, later in the century, the huge wholesale money broker Overend, Gurney failed in 1866, and the Bank of England notably held back from providing assistance – not least because the Gurneys had been aggressive in their battles against Bank of England dominance only a few years earlier.

The opposite decision was taken in 1890, when the merchant bank Barings got into trouble over its loans to South America. Barings was considerably smaller than Overend, Gurney but established over a century and with the finest political and financial connections (a former Baring partner was currently running Egypt on behalf of the British government.) On this occasion the Bank of England arranged a consortium of leading London banks and bailed out Barings, which survived until further disaster struck a century later.

Thus over the course of the nineteenth century, British official policy on bailouts became established. Size and connections within the system were not the primary factors in deciding whether a bank should be bailed out. Both Pole, Thornton and Overend, Gurney were among the largest financial institutions, and both had very extensive networks of connections: Pole, Thornton with 43 country banks which were its correspondent depositors and Overend, Gurney with the entire money market through short term paper trading.

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http://www.prudentbear.com/index.php...r?art_id=10120