We debated about whether or not the government should be responsible for bailing out the major banks. The options essentially are: Yes, bail them out because without them our entire financial system and economy will crumble, or: No, don’t bail them out. Why should our government be responsible for bailing them out and helping a system that clearly isn’t working. This is a situation that has no clear answer, but since we are in a crisis, the most logical and appropriate answer is to bail the banks out because without them, our economy WILL suffer more and we will essentially have to start over with nothing. In my opinion, morally I think it isn’t right that the banks can fail time and time again and continued to be rescued by the government, but practically I can’t see another way of responding to the situation.
A lot of people ask how we got into this situation in the first place. Part of the reason is the structure of our countries entire financial system. Every modern economy needs a financial system, but the past two presidential administrations have decided on THIS one; a system that is essentially controlled by 13 major banks. By putting our faith and power into the hands of just a few people, it looks like we “put all of our eggs in one basket,” and have no diversification. There is no contingency plan for what will happen if they are to fail. If one fails, it affects the rest of them and then the entire system is in danger of crumbling. The government will try to prevent this from happening and the banks know that and take advantage of that by taking unnecessary risks that they don’t even end up paying the consequences for.
This brings about a point that we talked about briefly in class. Our system is controlled by those 13 major banks that are seen as “too big to fail.” Clearly they cannot fail because without them, what will we have? The “too big to fail” problem (TBTF) states that the main problem isn’t the actual size of the banks, but more so the interconnectedness of the banks. They are so connected with each other and additionally, the success/failure of the banks affects almost every other aspect of our economy. They cannot be allowed to fall into an uncontrolled state of bankruptcy (the domino affect that happened to Bear Stearns and Lehman Brothers). The TBTF problem creates 3 sub problems. 1) The banks have to be bailed out if they do fall. 2) The banks have incentives to take large risks because they will get bailed out if the risk is too large. 3) Banks are bad for competition, so they are bad for the economy. We put so much faith into the banks with no other alternative plan that it has sparked the question, “if banks are too big to fail, are they too big to exist?” It is dangerous to bank on (no pun-intended) this system working out with no contingency plan for what will happen if something major is to go wrong.
So what could have been done so that we didn’t find ourselves in this situation in the first place. I know it is hard to imagine, but we need to try to find other alternatives. It is not easy disrupting a system that has been used for decades, but given the current state of our economy, I would say that a change is needed. There are debates over whether or not to reinstate the regulations that existed during the 1930s as the economy was recovering from the Great Depression. Those regulations were in place for 50 years, and kept our economy stable during that time, so why not implement them again? Basically those regulations were lifted so that the banks could obtain higher profit margins, but I think it is time to stop helping the wealthy get even wealthier and impose regulations that will turn our economy around. Possible regulations now would be to regulate the derivatives market, which the banks frown highly upon. One thing that many agree upon is to increase the transparency of the banks so that we know what the inner-dealings of the day-to-day operations are, but obviously the banks are not a fan of that idea. Additionally, there are attempts to have the government exercise more control over the operations of the banks so that when they recognize that there is a problem, they can stop if there before the problem gets worse.
So to summarize what the book is saying in a sentence, yes, the government should bail out the banks, but changes and regulations need to be implemented that will change our financial system so that we don’t get into this situation again where they need to be bailed out.
What do you guys think? Should the government bail them out? They got themselves into that situation in the first place, so why is it their duty to jump in and rescue them time and time again. Do you think that the survival of our economy depends on the success of the banks? Is there an alternate method that we can use in which we don’t rely on the banks to have a thriving economy? Why does the government feel so obligated to involve themselves in the problems of the banks? What changes should be made to our financial system? Should we impose regulations? What regulations would these be? Should the government have more control? Or should things stay the way they are? We depend on the banks and have agreed that they are too big to fail (hence the reason for the government continuing to bail them out), but if that’s the case, should we even allow something that big to exist? What is the right next step for us to make in order to try to get our economy back on track in regards to our country’s financial system.