Quote:
Originally Posted by Soriak  A major bank going out of business would have devastating consequences. "The market" stops working when people lose confidence, just think back to the bank runs. As one collapses, customers at the other banks start to panic and withdraw their money, leading to more collapse.
In the end, everyone loses money (fractional reserve banking), the FDIC insurance has to pay up and from there it goes even further downwards: banks are major investors in a lot of companies that might go down with them.
There's some talk of having banks split up investment banking and private banking into two separate groups, like it used to be. That way, we could let one side go bankrupt without affecting regular banking. This is something a lot of big shareholders prefer to reduce the risk, but management hates it: bonuses are much bigger when the two are combined.
This is something that will have to come from within though. I imagine it may follow after the bonus structure is changed - I doubt the current system will make it much longer. |
Major banks are emboldened in their bad investments by the safety nets put in place to stop them from collapsing. They can be reckless because the government makes it
ok for them to reckless.
If there is no consequence to your action, then there is no reason not to do it if it results in a short term gain. The fed has removed
consequence from a free market system where the only limitation and regulation was supposed to be
consequence.
I understand what your saying about government oversight, but having worked in TIGTA for a number of years (The IRS investigative branch), let me just say that the government couldn't possibly prevent a disaster through enforcement. Its just not institutionally possible, at all. (The IRS is far more organized then the SEC and neither of them can pin down any big player.)
The market though, can..If the nets weren't there it would never sting as bad as it does now. The only reason those banks are in a position to disrupt as much as they are is because they have been allowed to grow like a cancer, when they should have failed ages ago.
Had they failed and died in their infancy this wouldn't be an issue. They would never have built up the investment capital to pose a serious long term threat of depression inducing collapse.
You can "prevent" forest fires in California for a long time, but that only makes the inevitability of a huge fire more certain. I, for one, would prefer to deal with small crisis's then stunting them in favor a giant collapse. This actually has more to do with politics then most realize..yay for a limited term administration system!
