Just Let Them Die

[grunion]

I think the risk is that people need credit... most people can't buy a house without a mortgage, some businesses cannot get off the ground without a bank loan.

If you let the banks fail, it may be morally justified (after all, AIG/Citi were the ones who screwed up). However, after such a failure credit might be hard to come by.... people may not deposit money in their banks (which means no money to make loans with) for fear of loosing their deposits.

No. Deposits in checking, savings, CDs and most Money Market Deposit Accounts in FDIC-Insured banks are insured up to $250,000. What is at risk (as they should be) are speculative investments. And bailing them out without regulating their use of the funds or the terms under which they can operate (a la Glass Stegall) does not one whit to ease the credit crisis.

 

[grunion]

Who would you put in charge? Janitors? Engineers? Rocket scientists? Doctors?

Someone with both good understanding and proper motivation. Similar to Randi's argument that it takes a magician that is familiar with the tricks of the mentalists and charlatans to monitor the MDC, it takes someone with a strong background in finance to monitor and regulate the banks. Yet it has to be someone with the public interest as her or his clear priority. Putting a banker in charge, with their cronies' private jets and Swiss ski chalets at risk, is like putting Uri Geller's Mom in charge of the MDC. There are loads of economists and finance experts out there that have devoted their careers to public service. Geithner, Summers et al don't qualify.

 

[Twiler]

Someone with both good understanding and proper motivation. Similar to Randi's argument that it takes a magician that is familiar with the tricks of the mentalists and charlatans to monitor the MDC, it takes someone with a strong background in finance to monitor and regulate the banks. Yet it has to be someone with the public interest as her or his clear priority. Putting a banker in charge, with their cronies' private jets and Swiss ski chalets at risk, is like putting Uri Geller's Mom in charge of the MDC. There are loads of economists and finance experts out there that have devoted their careers to public service. Geithner, Summers et al don't qualify.

So who, specifically?

 

[Segnosaur]

However, after such a failure credit might be hard to come by.... people may not deposit money in their banks (which means no money to make loans with) for fear of loosing their deposits.

No. Deposits in checking, savings, CDs and most Money Market Deposit Accounts in FDIC-Insured banks are insured up to $250,000.

You are assuming that in the event of a bank collapse that people will act logically. I can see at least some people pulling their money out of their bank account out of panic, because they either don't know about FDIC insurance, or don't trust it.

I could also point out that while $250,000 may seem like a lot to someone like you or me, it may not cover all the savings for some people (e.g. retirees keeping their money in a "safe" bank, wealthy people who want/need a significant amount of available funds in checking accounts, etc.)

 

[Manopolus]

You are assuming that in the event of a bank collapse that people will act logically. I can see at least some people pulling their money out of their bank account out of panic, because they either don't know about FDIC insurance, or don't trust it.

I could also point out that while $250,000 may seem like a lot to someone like you or me, it may not cover all the savings for some people (e.g. retirees keeping their money in a "safe" bank, wealthy people who want/need a significant amount of available funds in checking accounts, etc.)

Not to mention that there are some banks that have dropped FDIC insurance... I think there was something about the local Bank of America dropping down to only $100,000 in insurance... not even sure if it was FDIC; If it was, it was a lower class of it. They did this right before the time that the economy tanked, as I remember.

Anyway, it was around the time that I closed my account there and went to a smaller local bank... although that was because of a different issue (service charges were getting just a bit high, and the local bank still didn't charge me to have a checking account at all... don't believe the "no free checking" thread, you can still get treated decently at small town banks that cater mostly to farmers).

 

[balrog666]

So what about letting AIG and Citi fail and bailing out the folks they owe money to, instead? Seems logical to me. That way we get rid of the cause of the problem without the systematic failure. Epic failures like these deserve non-existence as a result.

Except that Fannie Mae and Freddie Mac (and their enabling legislation) were the cause of the problem and they are still operating "open loop" and making it worse all the time!!

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.

 

[grunion]

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.

Is that a bad thing? They screwed up, shouldn't the market punish them?

 

[Random]

An alternative that was suggested once the whole circular ponzi scheme started to implode was to have the government buy up the mortgages themselves, pay off the CDOs and renegotiate with the homeowners directly. This would have screwed over the CDS holders and the guys holding the lowest tranches of the CDOs, but the overall losses would have been much smaller.

Of course, this would have meant the government would be interfering in the market in a way other than handing rich people a whole lot of cash, and was instantly rejected. Better to have a fifty thousand dollar traffic accident at an unmarked intersection than have the government plunk down two hundred dollars for some stop signs.

 

[Segnosaur]

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.

Is that a bad thing? They screwed up, shouldn't the market punish them?

Yes they should be punished. The problem is, by punishing them you could end up hurting the economy as a whole. So yeah, AIG/Citi/etc. goes out of business for being greedy idiots, but afterwards the economy has to adjust, which could end up taking a long time and cause a lot of hardships, for people who want to get bank loans, for companies depending on access to credit, etc.

 

[geni]

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.

Thats a fairly minor problem. A more practical problem is that AIG provide a lot of legitimate insurence. Having a lot of companies needing to buy new insurence in the middle of a recession wouldn't end well.

 

[grunion]

Well gee, it sure is a good thing then that we will no longer let these companies that we bailed out get too big to fail.

Oh, wait, what?

 

[Segnosaur]

Well gee, it sure is a good thing then that we will no longer let these companies that we bailed out get too big to fail.

Oh, wait, what?

Which brings me to the questions I asked earlier: are the changes they've made to prevent further problems enough?

I'm in Canada. Here, we have 5 major banks. Each one of them would probably be considered "to big to fail". Yet we managed to escape the global financial meltdown relatively unscathed. Part of that is due to the fact that we never had the housing bubble that the U.S. had, but we also benefited from stronger banking regulations.

 

[grunion]

Which brings me to the questions I asked earlier: are the changes they've made to prevent further problems enough?

I'm in Canada. Here, we have 5 major banks. Each one of them would probably be considered "to big to fail". Yet we managed to escape the global financial meltdown relatively unscathed. Part of that is due to the fact that we never had the housing bubble that the U.S. had, but we also benefited from stronger banking regulations.

When Glass-Steagall was repealed, banks, formerly focused on credit and fiscal management, now went into the business of insurance, brokerage, and other financial services. The executives running the banking divisions now had to compete with the managers running these other guaranteed-lucrative businesses to drive revenues. At first they did it in their traditional usurious ways, by driving up credit rates and fees on the folks that could least afford it, and getting Congress to pass laws giving banks all kinds of special privileges. They gambled with their depositors' money. Even that wasn't enough to feed their gaping piggish maws, so they had to invent all of these new financial instruments and bribe their already bought-and-sold politicians into passing the Commodity Futures Modernization Act.

Even this unbelievable deregulation wasn't enough so they built more and more loopholes into the CFMA to emasculate even its ludicrously minimal restrictions.

Fortunately Canada and other countries maintained some sense of propriety about what should and shouldn't be legal for banking executives to do with depositors' and mortgage-holders' money. Unfortunately, though, national economies are intertwined, and when the USA sneezes, the snot is dispersed everywhere.

 

[DragonLady]

The problem is, by punishing them you could end up hurting the economy as a whole.

Ughmm.... This jumps out at me because we punish individuals all the time with no regard to the long-term hurt that might be caused to family, friends, businesses, churches, etc.

Why should the "economy" as a whole be an exception?

 

[Segnosaur]

The problem is, by punishing them you could end up hurting the economy as a whole.

Ughmm.... This jumps out at me because we punish individuals all the time with no regard to the long-term hurt that might be caused to family, friends, businesses, churches, etc.

Why should the "economy" as a whole be an exception?

I think its a question of degrees...

Yes, a family might be hurt to see a family member go to jail, but that's probably minor compared to a possible complete financial collapse that might have resulted without a bailout for the banks.

 

[balrog666]

Is that a bad thing? They screwed up, shouldn't the market punish them?

Didn't it?

Oh, and why not punish the people who told fostered the whole cf, Congress, the Fed, and a few presidents who looked the other way ...

 

[grunion]

Didn't it?

Oh, and why not punish the people who told fostered the whole cf, Congress, the Fed, and a few presidents who looked the other way ...

The markets are supposed to punish the bad financial decisions, the voters are supposed to punish the bad political decisions - isn't that the way it's supposed to work?