The Great Recession in 2007 – 2009 was a bank panic. Wave upon wave of fraud became so rampant among bankers, they gradually and then completely lost confidence in each other. They also – rightly – lost confidence in their assets. The collapse we saw resulted from bankers making a run on each other’s institutions. In the situation they had created, panic was a rational response.
First, they tried to sell their assets before buyers discovered they were worthless. When they couldn’t find buyers – all their prospects understood the huge fraud swirling around everyone – sellers tried to find some other way to prevent career-ending losses. No one wanted to follow Bear Stearns down the hole.
“What should we do?” the bankers asked each other.
“Well we have one group who are even bigger suckers than the people we’ve been dealing with.”
“Forget it. They would never buy off on a lie that big. They’re already angry about how much government wastes their money.”
“I should have been more precise. We don’t have to fool the taxpayers. We just have to fool the officials who control their money.”
“Those guys are savvy bankers. You’re not going to fool them, either.”
“Alright, you’re making me formulate these ideas carefully. We don’t need to fool them as such. We want to convince them to help us, so they’ll maintain their privileged positions.”
“How do we do that?”
“We tell them that without their help, we’ll fail. If we fail, the entire financial system could collapse with us.”
“Why would they buy that?”
“Fear is a huge motivator.”
“You’re saying we should tell them we’re too big to fail.”
“You’ve got it. People have to have a good reason to do something this immoral.”
“Too big to fail: that’s our bugaboo of doubt. We convince Treasury and the Fed that our financial structure, then the entire economy could disintegrate and sink. If they don’t keep us afloat, we’ll all drown together.”
“What happens when taxpayers discover their leaders played them again?”
“Who, the taxpayers or leaders?”