Economics of Politics : Banking Crisis Manufactured in 2009? A Scam?

What the bottom line here is we should have let the free market seek it's own level. But that wasn't the intent at all - a Rahm Emanuel said when he was chief of staff for Obama ," never let a crisis go to waste", even one that you manufactured.

Question - what part did Hank Paulson pay in this 'crisis' when he was fresh out of Wall Street and Bushes' Sec. of the Treasury? Was he in the employ of the democrats? Was this just a good idea to have him continue as Treasury Secretary for Obama for the transition, or was this the plan all along?

The question back then was how did this get started and who turned on the switch to start the ball rolling? Cooler heads said this wasn't right and wanted to think this through, but those with their collective hands in the pockets of taxpayer said 'we have to move now or all is lost'.

Looking back now it seems it was a scam from the beginning run by politicians that saw an opportunity to make billions. Who's fault, idea, was it that this had to took place so fast, within 24 hours? Paulson?

Was the Panic over Banking Runs Justified?
Source: Vern McKinley, "Run, Run Run: Was the Financial Crisis Panic over Institution Runs Justified?" Cato Institute, April 10, 2014.

April 22, 2014

Federal authorities overreacted to banking runs in the financial crisis, says Vern McKinley, a research fellow at the Independent Institute.

Bank runs are a consistent fear during times of crisis, and the 2007-2009 financial crisis prompted those same concerns. The idea is simple: financial turmoil leads institutions to announce losses, sparking panic among customers who race to the bank to withdraw their funds. And because banking institutions generally have invested most of their assets, these withdrawals threaten their viability.

Fearing the worst, the government jumps in to intervene to save the institution, insisting on a bailout that will prevent a larger, systemic crisis.

After the 2007-2009 crisis, the Financial Crisis Inquiry Commission discovered 10 bank runs at individual institutions, from Countrywide Financial to Washington Mutual to Bear Stearns to Wachovia. McKinley's concern is that federal regulators stepped in, unnecessarily, to prevent a systemic crisis that was not going to occur.

• For example, McKinley looks at Wachovia and Citibank -- banks at which federal regulators intervened "before they had determined the extent of the debilitation that would result from a run."
• Regulators acted early, and unnecessarily.
• Wachovia, he says, had enough liquidity to last an extended period of time.
• And as for Citibank, authorities seemed to have "assumed" that the institution was systemic, without any real analysis.
• The poorly managed bank should have been deemed a problem institution, but instead, it continued to receive federal dollars.

Moreover, there was no evidence that bank withdrawals were exiting the banking system entirely. In fact, total bank deposits actually increased during the crisis period, suggesting that withdrawals were simply being moved to what were seen as stronger, healthier institutions.

In responding to bank runs, regulators should allow the unhealthy institutions to fail. Poorly managed institutions should sink or swim on their own. Allowing failure is the only way to ensure that these unhealthy institutions will never again operate.