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Why did the U.S. bail out the banks instead of the people owing the mortgage payments to the banks? Is it because it would have cost more money to bail out the people, or is it for some other political reasons? What are all of the reasons that made the government bail out the banks during the 2008 crisis.

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  • I think the question is based on a misconception, since the US government DID bail out at least some of the people with mortgages. For instance HAMP (Home Affordable Modification Program) for people paying more than 31% of their gross income in mortgage payments: investopedia.com/terms/h/…
    – jamesqf
    Mar 8, 2021 at 2:37
  • What's the difference? Mar 10, 2021 at 12:33
  • As a home-owner in my 22nd year of ownership, I'd have done absolutely bonkers if the government had bailed out any other home-owners....
    – CGCampbell
    Mar 10, 2021 at 16:20

4 Answers 4

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(TLDR: because the Fed's intervention wasn't about fixing up the problems for who owes on the mortgage payments, but rather about avoiding a larger-scale systemic collapse of the banking system).

The intent was to avoid bank runs which is what happens when people largely lose confidence in a bank and many try to withdraw money at the same time.

Thing is, a bank does not take your deposits and lock it in a vault, which would just incur costs but yield not profit. Instead they turn around and loan it out to other people, with contractually agreed-upon loan periods that easily run in years. This is good for the bank and the economy, but it also means that there isn't enough money at hand to give everyone their deposit back at the same time.

Let's say a bank has $100 in deposits, it may only have $5 or so in liquid (easily-cashed in) assets (aka reserves) it can return deposits with. If that bank has lost $10 already (on its long term loans) and people are worried about it then it is easy for folk to overwhelm the $5 reserve and the bank going insolvent. (These are made-up numbers, but they express the general idea).

At which point a good proportion of $85 more of value can evaporate from everyone's pockets even though the original loss was quite limited at $10.

As per the wiki article on bank runs:

Banking panics began in the Upper-South in November 1930, one year after the stock market crash, triggered by the collapse of a string of banks in Tennessee and Kentucky, which brought down their correspondent networks. In December, New York City experienced massive bank runs that were contained to the many branches of a single bank. Philadelphia was hit a week later by bank runs that affected several banks, but were successfully contained by quick action by the leading city banks and the Federal Reserve Bank.[10] Withdrawals became worse after financial conglomerates in New York and Los Angeles failed in prominently-covered scandals.[11] Much of the US Depression's economic damage was caused directly by bank runs,3 though Canada had no bank runs during this same era due to different banking regulations.[

So there is a good reason to keep the bank afloat and it is cheaper to bolster up the bank around that lost $10 than to reimburse its creditors to the tune of $85.

Note that this is related to the FDIC, also in place to keep people from panic withdrawal for the same reason.

Also banks that are desperately hoarding cash to avoid insolvency are unable to loan money to new and healthier businesses and this can starve the wider economy of money, further inflicting pain.

However, what did not need to happen was bailed out banks giving their execs bonuses. That is a testament to the greediness of many actors in that sector and is a clear case of moral hazard. One could argue that many of the higher ups in those banks, those who approved a strategy based on risky loans, could usefully have been replaced with more competent personnel and employed more gainfully flipping burgers.

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  • Comments are not for extended discussion; this conversation about how politics could have handled the debt crisis in a better way has been moved to chat.
    – Philipp
    Mar 6, 2021 at 20:38
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    Your third paragraph reminds me of Jimmy Stewart's speech in "It's a Wonderful Life".
    – Barmar
    Mar 7, 2021 at 1:22
  • My understanding is that what you're talking about applies to commercial banking, and the banks that were bailed out were investment banks. Mar 8, 2021 at 2:07
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    I find myself disagreeing strongly with your final paragraph. I don't want, or need, some older codger of a CEO flipping MY burgers...
    – CGCampbell
    Mar 10, 2021 at 16:16
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Because if the banks collapsed, then thousands of other viable businesses would have gone down with them

One of the key functions of a bank is to lend money to businesses to allow them to invest in things like equipment, training, staff, materials, and so on.

As an example, imagine a company that produces textbooks, and they have an order from a school for a thousand books, paid on delivery. The company still needs to buy the materials needed to produce the textbooks, and that money will usually come as a loan from their bank. If there is no bank to lend them money, then they cannot purchase the materials to make the textbooks, which means they can't deliver the textbooks to the school, which means they won't get paid by the school, which means they have to lay off all of their staff.

Now, on the subject of a "bail out": it's not like the government just gave the banks money with no strings attached. Rather, the government either loaned the money to some banks (which was repaid with interest), or they bought significant ownership stakes in others (on which they made a profit when those stakes were later sold).

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    Excellent answer, but I think the point they’re trying to make is, if the banks were at risk of going under because people defaulted on their mortgages, why not save the banks by giving the people money so they can pay their mortgages, rather than helping the banks directly.
    – divibisan
    Mar 6, 2021 at 16:02
  • Because that would just encourage more of the bad behaviour that led to that mess in the first place. The approach that the government took came with a lot of pain for the banks who received the "bail outs", so they're not encouraged to do it again.
    – Joe C
    Mar 6, 2021 at 16:04
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    Isn't it on the banks for giving out the loans in the first place? The problem with bailing out the banks instead of the people with the loans is the banks will still make money from them loans so they will come out ahead in the end and people still don't have money to spend. If the bail out the loan holders they can start pumping more money back into the economy which will help everyone in the long run. In the end if you call getting a loan a bad decision it is a bad decision for giving the loan as well.
    – Joe W
    Mar 6, 2021 at 16:08
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    Getting a loan is not a bad decision. Getting a loan that you know you cannot afford to pay back is a bad decision. And there was a lot of that in the years leading up to 2008. But if, as you said, "the banks will still make money from them loans", then there would have been no need for government intervention in the first place.
    – Joe C
    Mar 6, 2021 at 16:11
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    @JoeW the banks who suffered were not necessarily the banks who made the mortgage loans (they were packaged up and resold in groups, often hiding the bad loans behind a few good ones). Also the situation wasnt as simple as the “banks bad, customers innocent, nuff said” as popular belief has it - there were changes in regulatory requirements which forced banks to give out more subprime mortgages, and there were bad third party mortgage advisers who lied on applications, and yes there were bad customers who lied in order to get on the flipping market. The banks deserve some blame still.
    – user16741
    Mar 7, 2021 at 20:04
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"Bailing out" sounds like the US Government simply gave free money to the banks (or more broadly financial institutions including Fannie and Freddie).

In fact, "bailing out" largely meant the USG either lent to banks or bought toxic assets (that at the time no one else wanted to buy). (These toxic assets indirectly included mortgages, usually in the form of mortgage-backed securities.)

When all was said and done, the USG actually profited from all of this "bailing out". (ProPublica, estimates that as of 2022, the USG made a $109B profit.)


When you say "bail out ... the people owing the mortgage payments to the banks", you seem to be thinking of simply canceling these loans.

This could have been done, but only at huge cost, which is why it wasn't done.

Moreover, such a form of "bailing out" of housing borrowers would've been nothing like the "bailing out" of the banks that actually occurred.

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Because it is not only easier to just bail out the banks they have more influence and are able to dictate what happens with less problems.

The problem with trying to bail out the loan holders is how do you go about doing it? Do you send money to them and have them pay off the loans? Do you send money to the banks and have them pay off the loans? If you send money to the banks how is it decided which loans are paid off and which are not?

While it would seem to be more fair to bail out the loan holders instead of the banks the problem is how do you go about it in a fair manner that isn't going to cost a lot of money and time to enact?

In the end it happens this way because of the overhead of trying to bail out many individuals instead of a single organization.

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    There's also the fact that many people (I'm one of them) simply didn't need any sort of bailout. If you'd bought a house that you could reasonably afford (instead of the maximum you could convince a bank to lend), and had no intention of selling during the downturn, then the so-called mortgage crisis didn't affect you. So by bailing out those individuals who got themselves in trouble, you'd be rewarding bad judgement.
    – jamesqf
    Mar 6, 2021 at 17:46
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    @jamesqf Bad judgement goes both ways though. The banks are also responsible to make sure that the loans they give out can be paid back.
    – Joe W
    Mar 6, 2021 at 17:47
  • That's true, but (at least as I understand it) bailing out the banks meant giving them loans which would eventually need to be paid back, which isn't much of a reward. I don't know exactly what bailing out individuals would entail - perhaps paying off some fraction of the mortgage? - but it would seem to be more of a reward, especially if the bailout only went to those who were underwater or delinquent on their mortgages.
    – jamesqf
    Mar 6, 2021 at 23:40
  • @jamesqf But the problem is how do they pay it back? In the end the problem comes from loans that can't be paid back and the real question is how many of those loans could never be paid back from the start.
    – Joe W
    Mar 7, 2021 at 1:36
  • Do you mean the bailout loans to the banks, or the original mortgages? In the first case, the banks have some years of losses from foreclosures on mortgages, but eventually become profitable again, and repay the bailout loans. (Which is what I think has happened.) If the mortgages, the people who took out mortgages they couldn't repay get foreclosed on, and perhaps declare bankruptcy. Those who did repay their mortgages benefit from a rising real estate market. (And there were "bailouts" such as HAMP that tried to refinance mortgages to be more affordable.)
    – jamesqf
    Mar 7, 2021 at 18:07

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