Why Not Bail Them All Out?

Kevin Drum says we need bailouts for everyone:

Yes, the banks had to be rescued. But homeowners should have been rescued too.

I think that’s right. But that’s why it’s important to return to the specific contours of the Geithner/Barofsky dispute which mostly have to do with helping underwater homeowners at the expense of banks. The way Barofsky puts it, recall, is that the administration “chose the interests of Wall Street banks over that of homeowners” which is an equivalent formulation. Faced with some zero sum questions about how to allocate losses between homeowners and bankers, Team Tim chose at the margin to try to maintain a well-capitalized banking system while Team Neil would have preferred to shore up household balance sheets specifically at the cost of less-capitalized banks.

Now of course there were alternative policy options to choosing. For example, we could have just printed up a bunch of money and handed it to underwater homeowners. That’s good for the underwater homeowners and also good for the banks. The problem obviously is that renters and homeowners who didn’t have underwater mortgages would—rightly in my view—have been a bit pissed at that kind of selective bailout. But there’s no reason a “print money and give it to people” initiative would have to be limited to underwater homeowners. You could just have given money to everyone.

But that’s why I keep coming back to the idea that for all the sound and fury of the Geithner/Barofsky dispute it’s not decisively important to the broader economy. The best bailout would have been the most general bailout and the most general bailout would have been generalized fiscal and monetary expansion—helicopter drops paired with the stated policy objective of boosting aggregate spending (by firms, households, governments, and foreigners) back up to trend levels.