The idea of bailing out banks is far older than the 2008 fiasco. During the next crisis, bailouts will come in one form or another. Secretary of the Interior under President Reagan gives an account from 1982 on third world countries not being able to repay their loans. From James Watt’s memoirs:
Secretary Regan was explaining the inability of those destitute countries to pay even interest on the loans that individual banks such as Bank of America, Chase Manhattan and Citibank Manhattan and Citibank had made. The President was being told what actions the United States “must” take to salvage the situation.
After the Regan and Stockman briefing there were several minutes of discussion before I asked, “Does anyone believe that these less developed countries will ever be able to pay back the principle on these loans?” When no one spoke up I asked, ” If the loans are never going to be repaid, why should we again bail out the countries and arrange payment for their interest?”
The answer came from several voices at once, “If we don’t arrange for their interest payments, the loans will go into default, and it could put our American banks in jeopardy.” Would the customers lose their money? No, came the answer, but the stockholders might lose dividends.
In amazement, I leaned back in my large, leather chair, only two seats from the President of the United States. I realized that nothing in the world could keep these high government officials from scrambling to protect and bail out a few very large and sorely troubled American banks.