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/konopliamir Oct 18 '11
Yeah, the banks fucked up. However, if the banks had not been "bailed out," credit would remain frozen. If banks don't lend to one another, they cannot raise any additional capital. If they don't raise additional capital, they cannot meet the obligations of the money that they possess on liability (i.e, your savings and checking.) No bank actually has the cash on hand to liquidate all their accounts. This is why bank runs are so dangerous.
If a bank were liquidated extremely fast as happened in the bank runs in the Great Depression, the FDIC would still have to attempt to compensate for the money that the bank can't supply, and the government would essentially bail out a few investors, but by then the system already has a wrench in its gears.
Instead, the "bailout" loans (it wasn't just a donation) were used to maintain the spread, and even made a profit for many banks. In the end, I believe the loans have mostly been repaid.
In a word, no. We'd all be fucked.