There are those that claim that if we did not bail out all of the insolvent Wall Street financial institutions, the whole world would have went to hell in a handbag. This is false claim.
A bank has assets and liabilities. In the case of an insolvent bank the assets are the bad loans, and the liabilities are the bonds and shares sold by the bank. The banks that needed to be saved had too many bad assets in relation to their liabilities.
So let the bank go bankrupt. The shareholders and bondholders lose their shirts, the liabilities of the bank are wiped out out, and voila, a healthy bank. It is that simple.
So the great question is why our government will not let these bondholders and shareholder just take their losses. Why is the government spending trillions of taxpayer dollars to save the skins of those that invested in Wall Street banks?
And even if we assume the bailouts were needed, how come the shareholders and bondholders in the banks were not wiped out first? Obviously if the major liabilities of the bank are reduced substantially, any bailouts would have been much less expensive for the taxpayer.
