Privatized Profits Socialized Risk

On October 3, 2008 President George W Bush signed into law the Troubled Asset Relief Program (TARP), which authorized the United States government to spend up to $700 billion buying up assets and equity from private financial institutions.

“In particular, the program was designed to deal with "troubled assets" which it defined as (A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress."

In short, the government was reacting to the Subprime Mortgage Crisis which was wreaking havoc on the US economy. And, contrary to what you may have heard from conservative ideologues, the people that caused the crisis are the very same people who became the recipients of what is generally referred to as “The Bailout”. The economic leaders of the industrialized nations had no trouble identifying the culprits:

"During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions."

The above paragraph grandly titled the "Declaration of the Summit on Financial Markets and the World Economy" was the conclusion drawn by the leaders of the Group of 20, meeting in November of 2008, to determine the causes of the ongoing global financial crisis. A crisis which was precipitated by the collapse in value of mortgage-backed securities issued by US financial firms, and sold to investors across the globe. What you saw during the manic years of the US real estate bubble was a complete abandonment of sound lending principles. There are those who will try and convince you that it was all the fault of poor people and deadbeats receiving loans they didn't deserve, and could never pay back. Don't believe it. Look at the compensation and severance packages that the CEO's of financial institutions received, after losing tens of billions of dollars for their shareholders and investors.