This post really caught my attention.
It seems that more and more analysts are pulling their attention away from the "global economic meltdown" terror fiasco, and spending more time identifying the underlying causes of the economic recession (AKA, who to blame). It is a unanimous decision that bad debt and large banks are "to blame" and people are out to get blood. The "to big to be allowed to exist" idea that Yglesias discusses in his blog goes something like this, we cut down big multinational banks in favor of banks that grow on the local scale. This way if a bank or two fails the entire country doesn't wet itself. Yglesias also points out that if we used a broader banking system involving small scale banks, we wouldn't necessarily have to regulate them as stringently because, according to him, the function of regulation is to ensure that the banks don't fail and they don't need to be bailed out.
Granted, Yglesias isn't saying that we NEED a banking system like this, he is merely pointing out a shift in opinion. However, I personally don't see any potential benefit from removing larger banks in favor of smaller ones. Furthermore, I think that if we did eventually end up with a smaller scale banking system, the need for regulation would be more so then today. Simply because the amount of faulty loans to homeowners could run rampant and unchecked at any moment. Among other things, I think that this would be an economic sidestep rather then a solution to the many many problems at hand. Sure, with a smaller banking system we wouldn't have to worry about putting our eggs in one basket so to speak, but we shouldn't forget that the people running those smaller banks could be just as careless as those responsible for the economic fiasco today, and we would be just a shy throw away from putting our eggs into a bunch of separately crappy baskets. (in which case the need for a bailout might be just as eminent)
In any case, I think the fact that we at least have some ideas floating around is a positive step towards economic reform even if this particular one wouldn't earn my vote.
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6 comments:
I don't really know, I doubt that downsizing is a good thing to do in this situation. I mean couldn't increasing the flow of money create more jobs. Maybe making some modifications on how people are spending would be more beneficial. Big banks are a good thing, when they aren't making stupid decisions on who they lend money to. Having Three big banks in direct competition would make it almost impossible for any one of them to fail. But I am a Highschool student against somebody that is probably an expert.
The entity responsible for the economic crisis is the government.
This crisis has been caused by too much regulation. The Federal Reserve sets interest rates too low, and the government encourages banks to give out loans to anybody. If the government would just stay out of all this, the banks would not make these bad loans, simply because they are unprofitable (and any bank that makes such bad loans would go out of business, leaving only good banks).
The purpose of a bank is to make money. Banks would not purposely give out bad loans without government pressure and the promise of a bailout if they fail.
Your points are right in context, but I'm a bit of an idealist and therefore I have a serious problem with your broad usage of the word "regulation."
Why cant we set limits to "creative financing options" but yet we feel an obsessive compulsive urge to tinker with interest rates as much as we want? Well thats because the people doing the "regulation" are stupid.
We lowered interest rates, so what did banks start doing? Putting out more loans. With more loans, people spent more money they didn't own, that is until the bill came back and they realized, "oh crap, I don't actually have this money to begin with!" Well guess what, the hundreds of "creative" loans you put out there aren't coming back and your banks end up in this grand fiasco.
Like I said, I agree with you that the government is to blame, but regulation is a two way street, and it is entirely unfair to say that regulation is the motive behind the effect. It was BAD regulation coupled with the bank's poor loaning policies that pushed an industry up on credit that never existed, and people need to take responsibility for that rather then simply blaming the mechanism that funneled their stupid ideas.
Yeah and if the federal reserve didn't hold the interest rates so low, this crisis would not have happened. So regulation of the interest rate helped cause the crisis. I'm not sure where you disagree with me.
If there were no federal reserve setting interest rates, the banks would set their own interest rates (much in the same way other companies price their goods). The federal reserve rate is basically a price ceiling. If banks set their own, they'd set a higher rate, fewer people would borrow, and there would not be a problem.
downsizing? it doesnt matter what size the banks are as long as they are doing their job and lending/saving money to the people. bad banks fail, good banks prosper, regardless of the size of them. the government should have no say and no need to regulate because people who run multi-billion dollar organizations tend not to be dumb or careless. they will learn from the people before them and if bad banks go bankrupt because of faulty loans, banks to follow will learn and regulation wont be necessary.
however, if we regulate and bail the bad banks out, people might not make faulty loans, but they will find another way to exploit the economy because they are greedy and will expect a bail out plan from the government.
the only good thing about possible downsize is that the government will be less likely to step in because a majority of the people will be less dependent on one bank. that would make the government feel less "responsible" and less likely to intervene.
i do not think that downsizing i a good idea because because it would only limmit the number of jobs. increasing the flow of money creates more jobs.
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