In the year 2007, market analysts began to question whether the housing bubble was primed to burst. Little did they realize, not only was it going to burst, but it would have ramifications beyond their predictions. Because banks’ practices of subprime mortgage lending, people took out loans they could not pay back. As a result, banks went bankrupt and the housing market tanked. The bubble had burst, and the government was preparing to handle the situation in the wrong way.
Under the Bush and Obama administrations, Congress quickly passed billion dollar spending bills to rectify the situation. American tax dollars would be spent on the businesses responsible for the situation in order to keep them afloat. The bailout of the financial industry alone cost taxpayers $700 billion.
According to Jeffrey Miron, a senior lecturer at Harvard University in economics, and one of 166 economists who signed a letter to Congress denouncing the bailout, the spending bill was a terrible idea that would only delay the inevitable market recession. Instead of bailing out the financial industry and rewarding poor business practices, Professor Miron suggests letting the banks go bankrupt would have been a much better alternative saying, “The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy… Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a business that remain profitable”.
The federal government could have allowed these banks to go bankrupt, and their assets would have been picked up by other banks which were not engaging in subprime mortgage lending. Instead, the government opted to pay them with tax payer money. Essentially, the government set the precedent that it would bail out any company regardless of business practices if the crisis is dire enough. This precedent could be seen with future bailouts of underperforming industry, such as the automobile production companies in America. The bailout of the financial sector represented bad morality, bad economics, and bad politics.