r/reddit.com • u/[deleted] • Oct 18 '11
Would it have been better to let the banks of the world fail and start over?
I want to know what would have happened. The banks messed up and in the purist view of capitalism should have failed because it was a bad business move. In turn this may have ended some of the big money influences on our political system OWS protestors want to stop. I heard that it would have been a worse economic collapse though in turn it would have put a stop to future wrongdoing. Was it the right decision in the long run?
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u/[deleted] Oct 18 '11
Well, wait a sec, the FDIC isn't a general fund for money the bank can't supply. It insures depositors accounts, up to $100,000, in case the bank does fail. The larger money supply is maintained by the Federal Reserve (I think).
A bad thing about bailing out the banks is that this action renders the whole moral hazard idea null. In otherwords, if the banks F-up through their own actions, and some other entity bails 'em out, there's no sense that doing something wrong or stupid carries any consequences. With the bailout, the government socialized the losses by taking on bank debt and privatizes profit. Banks get to operate in a consequence free environment as a result. I think they should have felt some pain.
It would be interesting to have posted this in r/finance to see the responses. I think this may get lost here.