Most people don't seem to appreciate the first part of
the financial bailout. I don't approve the auto bailout part, but there
were inherently good reasons for the financial bailout: TARP.
Banks are required to have capital worth 5% of their assets (assets in banking are loans). That is Federal law and when a bank falls below 5% it is illiquid and must be seized by the government.
Most of that 5% is equity on the stock market, the banks public stock. So when the stock market drops 20% a bank who's equity might have been 6% of assets is now only 4.5%. The bank has to be seize by the Feds. By August the market was down 35% so most banks had to be seized. Or the Federal government had to buy their stock. Those are the only alternatives. Which is what TARP is all about.
That is what happened. The Federal government was faced with either putting the major banks of America out of business or buy their stock. Bailout. A reasonable action by the Feds was to create TARP.
Just so you know my view of what must be done to correct this problem
in the future. We need two regular commercial banks owned by the U.S.
Treasury that guarantees deposits of any size and can only recall a
loan or line of credit when the assets backing the loan are insufficient.
Business needs safe banks just as much as it needs stable currency.