Why We Can't Let Big Banks Fail

http://www.nytimes.com/2010/04/16/opinion/16krugman.html?hp






Below is the same version for those not interested in the link above^


The Fire Next Time

By PAUL KRUGMAN
Published: April 15, 2010
On Tuesday, Mitch McConnell, the Senate minority leader, called for the abolition of municipal fire departments.


Paul Krugman
Blog: The Conscience of a Liberal

Firefighters, he declared, “won’t solve the problems that led to recent fires. They will make them worse.” The existence of fire departments, he went on, “not only allows for taxpayer-funded bailouts of burning buildings; it institutionalizes them.” He concluded, “The way to solve this problem is to let the people who make the mistakes that lead to fires pay for them. We won’t solve this problem until the biggest buildings are allowed to burn.”

O.K., I fibbed a bit. Mr. McConnell said almost everything I attributed to him, but he was talking about financial reform, not fire reform. In particular, he was objecting not to the existence of fire departments, but to legislation that would give the government the power to seize and restructure failing financial institutions.

But it amounts to the same thing.

Now, Mr. McConnell surely isn’t sincere; while pretending to oppose bank bailouts, he’s actually doing the bankers’ bidding. But before I get to that, let’s talk about why he’s wrong on substance.

In his speech, Mr. McConnell seemed to be saying that in the future, the U.S. government should just let banks fail. We “must put an end to taxpayer funded bailouts for Wall Street banks.” What’s wrong with that?

The answer is that letting banks fail — as opposed to seizing and restructuring them — is a bad idea for the same reason that it’s a bad idea to stand aside while an urban office building burns. In both cases, the damage has a tendency to spread. In 1930, U.S. officials stood aside as banks failed; the result was the Great Depression. In 2008, they stood aside as Lehman Brothers imploded; within days, credit markets had frozen and we were staring into the economic abyss.

So it’s crucial to avoid disorderly bank collapses, just as it’s crucial to avoid out-of-control urban fires.

Since the 1930s, we’ve had a standard procedure for dealing with failing banks: the Federal Deposit Insurance Corporation has the right to seize a bank that’s on the brink, protecting its depositors while cleaning out the stockholders. In the crisis of 2008, however, it became clear that this procedure wasn’t up to dealing with complex modern financial institutions like Lehman or Citigroup.

So proposed reform legislation gives regulators “resolution authority,” which basically means giving them the ability to deal with the likes of Lehman in much the same way that the F.D.I.C. deals with conventional banks. Who could object to that?

Well, Mr. McConnell is trying. His talking points come straight out of a memo Frank Luntz, the Republican political consultant, circulated in January on how to oppose financial reform. “Frankly,” wrote Mr. Luntz, “the single best way to kill any legislation is to link it to the Big Bank Bailout.” And Mr. McConnell is following those stage directions.

It’s a truly shameless performance: Mr. McConnell is pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite. In recent weeks, he and other Republican leaders have held meetings with Wall Street executives and lobbyists, in which the G.O.P. and the financial industry have sought to coordinate their political strategy.

And let me assure you, Wall Street isn’t lobbying to prevent future bank bailouts. If anything, it’s trying to ensure that there will be more bailouts. By depriving regulators of the tools they need to seize failing financial firms, financial lobbyists increase the chances that when the next crisis strikes, taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse.

Even more important, however, the financial industry wants to avoid serious regulation; it wants to be left free to engage in the same behavior that created this crisis. It’s worth remembering that between the 1930s and the 1980s, there weren’t any really big financial bailouts, because strong regulation kept most banks out of trouble. It was only with Reagan-era deregulation that big bank disasters re-emerged. In fact, relative to the size of the economy, the taxpayer costs of the savings and loan disaster, which unfolded in the Reagan years, were much higher than anything likely to happen under President Obama.

To understand what’s really at stake right now, watch the looming fight over derivatives, the complex financial instruments Warren Buffett famously described as “financial weapons of mass destruction.” The Obama administration wants tighter regulation of derivatives, while Republicans are opposed. And that tells you everything you need to know.

So don’t be fooled. When Mitch McConnell denounces big bank bailouts, what he’s really trying to do is give the bankers everything they want.

I do not know why those banks could not have been allowed to fail. to be honest. Free market would have stepped in and a bank would have grown to fill the void.

How could a view about a bank be considered racist? O.o

didn't you read that guys? It spells out the great depression completely and how that happened, and if we let banks fail, thats what would have happened, there was a recent TIME poll that found that people didn't like the bailouts, but that they agreed their financial situation would have been worse if they had not been.

Capitalism isn't inherently better than anything else. It can always use some tuneups, Protection must be balanced with freedom, otherwise chaos reigns.

I think Dist would've gone Anti-Semitic on our asses.

really is that all people have to say?
darn, i wanted to debate.

Nuke
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D.C.

Obviously No one read this post of mine in "What Does America need to do?"

Nihil wrote:Speaking of America, and pertinent to fixing it, I just read two AWESOME articles in Newsweek,

Here is one of my favorite writers, Fareed Zakaria on Debt
http://www.newsweek.com/id/234277

Here is a thought provoking essay on America's political system
http://www.newsweek.com/id/234267

And here is something I always suspected might happen, the, slight, redemption of Bush through Iraq, FYI, the article's head is this

""""Rebirth of a Nation
Something that looks an awful lot like democracy is beginning to take hold in Iraq. It may not be 'mission accomplished'—but it's a start.""""
http://www.newsweek.com/id/234281

The second one there

Disturbed wrote:

thing944 wrote:I think Dist would've gone Anti-Semitic on our asses.

BAM! Now you KNOW I'm a psychic!

LOL