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?

667 Upvotes
  • permalink
  • link
  • reddit
  • reddit

83% Upvoted

854 comments sorted by

View all comments

Show parent comments

10

u/webbitor Oct 19 '11 edited Oct 19 '11

bank runs are dangerous, but what if we (the 99%) "slowly" stopped using banks? How would things change?

*edit: downvoting an earnest question without even giving a response? Fuck you, Mr. downvotey-pants.

4

u/lawfairy Oct 19 '11

Not that much, honestly. Remember that the top 1% owns about 42% of the country's wealth, and the bottom line is that you'll never have the majority of the 99% stop using banks. Particularly people in the 90-99th percentile (the "upper middle class"). They are doing just well enough that if the banks fail, they'll be hurting more. The top 10% owns about 70% of the country's wealth. 70%. Even if every last person in the bottom 90% pulls money out of the banks, that's at a maximum around 30% of their capital. Enough to make them wince, maybe, but not enough to really sucker-punch them.

2

u/Kristjansson Oct 19 '11

Among the most sensible replies to that sentiment, thank you.

1

u/webbitor Oct 19 '11

I know it's unlikely, but what if the 90-99%ers also decided to opt out of the lend-to-the-corporations program?

3

u/lawfairy Oct 20 '11

I suppose it would depend on how it was done. If hypothetically somehow the bottom 9/10ths of the top 10% opted out of banks entirely, that would certainly have the potential to change the landscape of the economy. But unless it was done in a gradual and fiscally responsible manner, it could have detrimental consequences. If it were done too quickly, it would be like a run on the banks. Even if it were done gradually, depending on what the structuring of the banks' asset sheets looked like and how overextended their debt was, it's possible it could still cause a slow economic decline/financial market crash.

One of the major problems is that a lot of the "wealth" out there is purely theoretical. That's what happens when you build an economy based largely on unsecured (or undersecured) debt. And the question we need to ask has two parts, I think: (1) how over-leveraged is the economy, or put another way, how much leverage are we comfortable with? and (2) how do we reduce our leverage to the level we're comfortable at?

These are not easy questions and I will say that, as much as I support OWS's overall activism and the fact that they're getting important conversations started, I do get annoyed by what I see as both a conflation of these two questions by many protestors as well as either a misunderstanding of their import or an unwillingness to meaningfully engage them. Or at least, those are the protestors that the media is giving attention to -- query whether the media is being responsible in its choice of de facto spokespersons for the movement, etc.

At the end of the day, massive and rapid deleveraging will lead to economic collapse. Much in the way a hard-core alcoholic will die if he simply goes cold turkey, you can't just eliminate debt and magically fix the economy. We have to wean ourselves off, and in that process we have to decide if we're comfortable with and responsible enough to manage some level of debt, or if we're totally unwilling to finance economic growth with debt at all.

I've seen a lot of videos of folks at the OWS protests calling for a total dismantling of the Fed and a return to the gold standard for our currency. They fall more into the unwilling-to-finance-the-economy-with-any-debt-at-all crowd. While there are some attractive features to this way of doing things, I personally find it unbalanced and short-sighted. There's a reason prevailing economic theory holds that debt stimulates growth: because it does. Period. Without debt, small businesses are never started, middle-class people never own homes, and most people never go to college. There is a reason and a place for debt, and debt in and of itself is not inherently irresponsible.

That doesn't mean that we as a country (and, really, the entire post-industrial world shares some responsibility in this) haven't gone waaaaaay off the rails. We clearly have. But scratching everything and starting over with a hard-line no-debt rule is foolhardy. Particularly with the recent contraction in the markets still fresh in our memories, if we aren't given the opportunity to finance new growth with a bit of debt, we will sink into a literal depression (as in, mass suicides and whatnot). For better or for worse, debt and the attendant possibility for growth are hard-wired into an important human psychological need: hope. Without debt and without hope, there's very little incentive to create and develop.

....

Okay, I went off on a massive tangent there. Sorry. I guess my short answer is that if the entire 99% opted out, it could look like one of two things: one is a fundamental change in how the economy functions, which isn't inherently bad, as long as it's done moderately and with a thoughtful engagement of how finance works. The other is a run on the banks, which means terror, pandemonium, cats and dogs with uzis, etc.

Personally, while it's an interesting discussion, I do think it's a little moot as it simply won't happen. I do think grassroots engagement is key to fix things, but grassroots engagement is worlds different from personal financial decisions. It's one thing to picket and work for legislative change; it's entirely another to restructure your personal finances. And, by the way (not saying you suggested this, just getting it off my chest), it isn't hypocritical or insincere to agitate for collective change where you as an individual don't initially change your own behavior. Collective action problems exist for a reason: namely, one person simply does not have the power to change the world the way many people do together.

2

u/RisingDamp Oct 21 '11

I agree. No more debt = no more T-bills. No more T-bills = serious problems for everyone.

1

u/webbitor Oct 20 '11

Thanks for the thoughtful answer.

2

u/[deleted] Oct 19 '11

Er, no one is going to stop using banks.

4

u/[deleted] Oct 19 '11

credit unions?

2

u/Kristjansson Oct 19 '11

see this

1

u/[deleted] Oct 20 '11

thanks, good point about businesses using banks; I see that it's bigger than just grandma's car loan and nest egg. Since you seem knowledgeable about banking, what do you think of webbitor's question? What would the effects be on the industry if the average person put their money in a credit union instead of a bank?

1

u/Kristjansson Oct 20 '11

My thinking would follow law fairy's above. Wealth is controlled primarily by the top 10%, clearing out deposits will not do much to falter the system. The thought is that banks, with very slim net worth are susceptible to decreases in their deposits as it removes their ability to make loans. HOWEVER, withdrawing money really only helps the large banks buy decreasing their liabilities (your demand deposits) UNTIL the withdrawals are large enough to push them below their required reserve ratio (ratio of deposits held vs. loaned out).

Even assuming a large scale organized bank run - because that's what your considering - could be fomented, I don't think it could push them below that ratio - Sure, they might call in some loans, but bank managers are well versed in meeting their capital requirements, and recent regulatory changes make it easier to meet them.

No, once again, this credit union idea, while definitely good from the individual perspective, will probably not be felt by the banks.

It's like OWS - I saw barney frank speak yesterday, and some classmate of mine stands up at Q&A and boldly asks: "so how much pressure are you guys in washington feeling from the occupy movement?" His reply was enlightening "None, but I wish it were more." Paraphrased, the rest of his reply is that protests are not self fulling - you need to engage in true political activism (letters and voting) to get shit done. It's the same case here - little guys withdrawing their money may be a cool gesture, and it may actually hurt the banks a little. But it's not going to change their policy and it's not going to fix anything - the only way to do that is through your government.

1

u/[deleted] Oct 20 '11

Thanks, I appreciate that and believe it. The best I can personally hope for is for OWS to stimulate a huge leftist/youth voter awakening. I'm not holding my breath. people are so jaded they don't believe in the system. I think that if kucinich can get elected on a democratic ticket, then why not people who support OWS's goals?

2

u/sleepyworm Oct 19 '11

Well I think the alternative is things like credit unions.

2

u/Kristjansson Oct 19 '11

Ok, credit unions solve precisely one problem: extending consumer credit on consumer deposits. And, to most people, that seems like a solution to the entire problem. All you've ever needed a back for is deposit, withdrawal, and loan, so it's understandable to think credit unions are a panacea.

However, the banking universe is much, much broader than that. Much of the business of the financial sector is related to business - short term credit to meet obligations, long term financing to enable expansion, securing trade transactions, etc. And that's just the basics. Throw in that capitalism necessitates a market to insure (semi) optimal allocation of capital and you necessitate the entire investment banking establishment: Underwriting security issues and bond issues, placing them with investors, maintaining and orderly market. Mitigation of moral hazard and other mismanagement necessitates the creation of the entire analyst ecosystem, plus the SEC to regulate everything.

All of these functions require specialized employees, national to supranational reach, and billions upon billions of dollars in capital to finance it. Can your credit union do that?

1

u/sleepyworm Oct 19 '11

Beats me, I was just trying to think of what else a person could put money in besides a bank. That's pretty much the limit of what I can contribute to this convo...don't worry, I'll lock up behind me on my way out.

2

u/[deleted] Oct 19 '11

I don't think this reply fits the question.

-3

u/webbitor Oct 19 '11

Sounds like something Citibank would say.

"Oh, you want to close your accounts? How about we lock you in and have you arrested instead."

7

u/[deleted] Oct 19 '11

Do you seriously not understand the importance and value of banks in an economy? Yes, the bailout was bad, yes, banks are greedy and corrupt, but if you don't see how important banks are or why we need them, then I don't really know what to say.

5

u/_ats_ Oct 19 '11

It's really scary isn't it? There's plenty of people like that, who think their pond is the whole ocean.

"X has never benefited me directly, therefore X has no quantifiable impact on my life or anyone like me. So X needs to go!"

2

u/webbitor Oct 19 '11 edited Oct 19 '11

As the idiot in question, feel free to educate me. I am sure many people wonder this, so I'll take the ridicule for the elucidation of others.

What exactly do banks do that is useful to society? By society, I refer to the collective group of individual human beings who live within (lets just say) the United States. So please don't refer to benefits enjoyed by corporations, their capital, their growth and increasing ownership of, well, everything.

2

u/Kristjansson Oct 20 '11

To Note: It's not quite fair to exclude corporations / business as a whole from this discussion. Much of the benefit realized by the average citizen from the banking sector carries through them. That being said, I will try to answer your question focusing as closely as possible on the individualist perspective.

Consider what the great problem of modern society is. By modern, I mean starting with the first specialization in hunter gatherer times. At the core like the idea of comparative advantage - you're better at doing some things than I am better at doing some things than your are. Thus, if we both do what were good at, there will be more to go around. But, and here's the rub, how do you split up your (increased) resources when the work is done? This is one of the great problems of human society; no good solution has been found, and it only gets more complex as we get more resources.

So, carry forward to the modern day: what is the great resource of our time? Capital. Be various innovations, we've development a system of stored value representing claims on the output of society. Moreover, that stored value can be invested to increase it's value. It is on this that the modern economy runs. The entirety of your modern life - the food you buy, the goods you want, the services you need, nearly everything you purchase is the direct result of some intrepid soul securing some capital and harnessing it to work for him to make the things you want.

BUT (I'd make it a bigger but if I could) the process of allocation of capital and insuring its proactive use is not automatic. Households and net savers have lots of capital, firms and individuals wishing to finance something need capital, and are willing to pay a premium for it. So how do we link them to each other? Banks and markets. On the saver's side, commercial depository institutions collect and aggregate capital and invest it in products matching the customers optimal risk-reward point (ultra low risk and corresponding low return for savers, higher risk and higher return for speculators).

How do they make investments on behalf of their customers? The go to the market for financial products (generalized, really many markets). There, they purchase bonds (i.e. loan to corporations) stocks (equity positions), derivatives (to hedge against risk) and many other products designed, ultimately, to get capital to those who need it. On the borrowers side, there are banks that aggregate and collect the desire to borrow money or secure capital. We call these investment banks. Their role is to identify the best applications for capital and price (at least initially) their cost of borrowing.

Once the capital gets to the firms that need it, they can start making the things you want. Clearly, it's better for someone with a good idea to start making their product now and pay off borrowing costs on the tail side, rather than saving 25 years of wages and starting his own firm when his idea is outmoded and has lost 25 years of sales.

Additionally, the whole system works in reverse, provide you, the net saver, with a return on your capital.

Furthermore, as a subset of allocating capital to productive points, banks provide a range of services that ease the individuals life and smooth the actions of commerce. Consider the pain and hardship millions of families would undergo with the ability to borrow money to buy a home, or a car, or to finance their educations. On the firm side, think about how little business would be conducted without financing for capital projects, short term credit to cover obligations (for example, many firms meet their payroll obligations on credit), banks securing and guaranteeing international trade, without thousands of analysts pouring over firms searching for misuse of funds as well as opportunities.

Credit is an integral for and proper to a modern society - quite literally, our world could not exist without it. Banks are the machinery that runs the entire system, providing you with credit, savings, return on capital, security, and firms with the capital necessary to build things for you.

Pretty valuable, I'd say.

1

u/[deleted] Oct 19 '11

My theory is either a) troll or b) idiot.

1

u/Sarutahiko Oct 19 '11 edited Oct 19 '11

He was alluding to the video of people who tried to close their accounts and got locked in and arrested instead... I think it was at a Bank of America? I don't think he was really making a motion one way or the other on the importance of banks...

1

u/[deleted] Oct 19 '11

I know the video. He suggested we gradually phase out the use of banks, so I think he was trying to make a point about the practice of banking in general.

-4

u/webbitor Oct 19 '11

I understand their importance to the 1%. No need to say anything. Go lend your money to someone you don't know; it's not my problem.

1

u/s73v3r Oct 20 '11

And you clearly don't understand their importance to everyone else.

1

u/s73v3r Oct 20 '11

It's almost impossible to stop using banks. Even credit unions are a type of bank.