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Comment by stretchwithme | Hacker News Reader

What is the great disaster that was supposed to have befallen us had Secretary of Treasury Hank Paulson and former CEO of Goldman Sachs not gotten his $700 million slush fund?

Certainly many of those placing their bets on the collapse of housing bubble would not have gotten paid by AIG, but how does that cause the rest of the economy to collapse exactly?

Yes, your investments would certainly have experienced losses as the companies doing all the stupid things dropped in value once their folly was fully revealed. But isn't dumb behavior and blind faith in casinos supposed to be punished?

Instead of that righteous outcome, the costs are no being dumped upon millions who had nothing to do with all of the stupidity. And the reckoning has merely been postponed and perhaps will grow even larger now that they have been encouraged to continue taking foolish risks.

Personally, I think Warren Buffett knows better.

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"What is the great disaster that was supposed to have befallen us..."

Simply put, the thesis is that the entire world economy would have collapsed. It would have started with most of the investment banks being unable to do business and shutting their doors. This would have caused a chain reaction other parts of the financial system since the big money-center banks provide much of the overnight lending liquidity for smaller banks (and each other). Banks would start failing at an incredible rate.

As the banks started to fail, the equities, bond and commodities markets would have collapsed. All these markets rely on short term lending, not just for leverage, but to underwrite transactions. Even if this were not the case, much trading volume would have dried up. This combined would have led to a crash in those markets.

Finally, and most importantly, most businesses rely on lines of credit and other short term debt facilities to finance day to day operations. They use this to smooth out the cash flow when buying raw materials/inventory, purchasing assets and meeting payroll. These would have all been effectively frozen. You would have either seen paychecks becoming worthless or massive layoffs within a few weeks to a few months of the initial bank collapses. By massive, I mean a spike of an additional 10% to 20% unemployment within a few weeks or months.

I won't go into the effect all this would have on currencies and international trade.

All told, it would probably have plunged the entire world into a depression that would have rivaled or exceeded the Great Depression of the 1930's. It likely would have been worse because of the interconnectedness of the world's financial and commercial systems today.

It's very easy to make up unfalsifiable scary stories to justify policies you like.

That I like?!?!? I hated the TARP bailout. The problems were caused by insanely lax government oversight, poor institutional risk assessment and a healthy dose of outright fraud. IMO people need to go to jail.

That said, the government had no real choice. I'm no financial system expert, but used to work in finance and even I can see that something was needed or else the system would collapse. Is it possible that you're letting your distaste of the financial system and players involved color your judgment?

The choice we faced was either cut off the leg or the patient dies when the gangrene spreads. No one likes cutting off the leg, but if the alternative is that you die, I think the choice is obvious.

Is it possible that you're letting your distaste of the financial system and players involved color your judgment?

It's unlikely, since I don't have any distaste for finance. In most threads I'm the solitary defender of the financial sector.

As I said, it's easy to make up a scary story of doom. The scary story assumes that everyone will try to continue doing everything they previously did before the banks collapsed, and then give up rather than do things differently. Or perhaps the assumption is that the way things are now is the only way things could be. Either way, I'm unconvinced.

I wouldn't say he's scaremongering. There is historical precedent for what happens when liquidity in the marketplace dries up or how people behave when banks tighten their lending or go out of business.

It's not whether businesses could do something different. It's how much time and money it would cost them to make the transition.

It's equally easy to postulate that the actions taken were not necessary to prevent such scenarios. (in other words, your response above is not an argument.)

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