Right, you need to combine saving the financial system with systemic change. Letting them fail is equivalent to letting the system crash and the doing nothing.
I just dont understand why people talk about the "financial system". Its a bunch of banks and some of them fail. The only banks that failed are those who are bad.
A financial panic is not an avenging angel that slays the wicked and leaves the righteous untouched.
Without the possibility of a bailout, if, say, Citbank went under, this would not only screw Citibank’s depositors—most of whom were hardly in a position to audit Citibank’s books before opening their accounts—but also every bank that had loaned money to Citibank. If a bunch of people who deposited money with Citbank owe money to Wells Fargo, then Citibank’s failure hurts Wells Fargo. And if Citibank’s failure led the depositors at Bank of America to get nervous and withdraw their money, then BoA would be at risk even if it had been prudently managed up until the crisis. And then BoA’s and Wells Fargo’s creditors... etc., etc., etc.
Well yes some banks can be hurt in the process that are not acctully bad but history shows that in most cases bank runs happen on banks that are really bad. If you are a conservative bank you will acctully get a lot of cash (this happend in switzerland) witch you can then lend at high rates to banks that need it (if there wouldn't be the fed pushing the intrest rate down). Witch banks acctully are in a bad place and witch are not will be the task of bankers and private investors. The banks that are acctully good will probebly get survive.
So yes there will be some collateral damage but that just cant be avoided in a cycle. It would be much better then the mess we are in know.
That all beeing said in a system where you have fractional reserve banking (witch is a bad idea anyway) there is a case (not one that I totally agree with) to be made that we need a "lender of last resort". But beeing a "lender of last resort" is quite diffrent then what the fed did. They literly flooded the hole bankingsystem with cash, knowbody knew what was going on, how will be saved who want, witch banks acctully are still liquid and witch will bust when the flow of cash stops. Why should banks lend to each other if the get free money. If I would get free money, I too would just sit around and wait until the worst is over. If every body does that we acctully have a bigger problem a long rescession instead of a short crash.
Uh, no. Read up on counterparty risk, credit default swaps, and the crazy interdependencies of financial institutions.
If bank A goes bad, institution B might have sold lots of CDS on bank A, requiring it to pay out more than it is able, so it goes under. Institutions C and D might have sold CDS on institution B, etc.
All the banks deal with and depend on each other. Also, in a bubble most banks are invested in the same scheme. When the bubble finally pops, all the banks get in trouble. So "financial system" is exactly the right term.
There are alot of banks and even Hedgefonds that did not invest into realestate (because the could not actully figure out what that stuff was worth and didn't buy them just because it was what "The cool kids where doing") and where not in trouble. An yes you are right the hole system has "trouble" but the system wont just crash. Everybody that is "bad" will go done and maybe some others will go down but if a bank had enough reservse and had not a shitlode of bad asseds the could survive the storm. The remaining good asseds of the banks that go bust will be liquidateted. The conservative banks can now make the money that the did not get in the boom years.
Should we always bail them out, even after they begin to predicate their practices on the fact that we will hand them more stolen money when they screw up?
Why would you bail them out? The banking sector is much bigger then it should be and its natural that the sector shrinks again after a bust. The the economy crumbels when banks fail is just wrong, the world would have much less problems if the bad banks just failed.
I love that you link to a wiki article that basically says "it's a theory" - and that's exactly my point. You can't prove that we would have been fine if the banks had failed because we didn't let it happen. Ask yourself this - what if the theory is wrong?
A lot of what our governments do is based on theories and in this case they obviously decided to step in to protect their citizens. Just the same way, you cannot prove the opposite.
De facto you can decide to trust the government you were voting for or against - and me being from Euroland, I rather trust that they don't fuck up too big for important decisions like that. I know this is different in the USA.
But, the point isn't so much whether it was all right or wrong, the more important (and frustrating) point is that WHAT they did wasn't done very diligently because at the end of the day, bailout billions were passed out practically for free and nothing changed.
The question whether it was right or wrong to intervene is more a philosophical question and how much it has compromised the very foundations of our value system and economy: free market and capitalism.
>But, the point isn't so much whether it was all right or wrong, the more important (and frustrating) point is that WHAT they did wasn't done very diligently because at the end of the day, bailout billions were passed out practically for free and nothing changed.
>The question whether it was right or wrong to intervene is more a philosophical question and how much it has compromised the very foundations of our value system and economy: free market and capitalism.
That's all great - and I agree with your points, but the original point was "It wouldn't have destroyed the economy for everyone."
We simply do not know that - maybe, if the bailout hadn't happened, the economy would have plunged into a severe depression.
Even if it destroys the economy for everyone?