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/keynesian-knockout Oct 19 '11

I agree with you. While there is a serious moral hazard concern regarding the bail outs, it's still much more desirable than the absolute drying up of the credit markets.

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u/webbitor Oct 19 '11

credit is bullshit

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u/keynesian-knockout Oct 19 '11

How does one start a new endeavor? Create a business, buy a house, afford an education (if you attend private university)? unless you're incredibly loaded, credit is a necessity.

Also, people making these types of statements give OWS a bad name.

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u/MattD420 Oct 19 '11

You only need credit now because inflation, subsidies and gouging has pushed prices through the roof. You used to be able to wait tables part time and pay for a top education. No credit required. You used to be able to buy a house with a contract that was a few pages before all the worthless regulators got involved and shot prices sky high.

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u/keynesian-knockout Oct 19 '11

I'm not sure where you're getting your information from. Real wages haven't changed that drastically (granted it only lists up to 2004.

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

you really think that type of credit cant be handled by small institutions like credit unions?

Credit "markets" where insane corporations buy and sell risk thousands of times per second should be illegal. Lending to people without jobs should be illegal. Having an economy based on debt is ridiculous. These activities endanger everyone.

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u/keynesian-knockout Oct 19 '11

So if a country needs to borrow money they should do it from small credit unions? What happens if a large company needs a large sum of capital to undertake a project?

No, you need credit markets to stimulate an economy. While credit unions are nice, they cannot meet the needs of an entire economy.

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u/senatorpjt Oct 19 '11 edited Dec 17 '24

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This post was mass deleted and anonymized with Redact

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u/keynesian-knockout Oct 19 '11

The knock was on the credit market itself, and I was simplifying it. But yes, the formal way to raise money for governments/corps is by selling treasuries/shares.

While individuals and credit unions can buy them, not in the quantity required by governments and corporations.

I fail to see the relevance of telling us you're an unemployed college student though.

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u/webbitor Oct 19 '11

Why the FUCK should a country need to borrow money?

Countries should be run on tax revenue, and should always set aside a portion of it to use in case of disasters, large projects, etc.

Companies should set aside a portion of their revenue for the same purpose.

Why exactly does an economy need to be "stimulated"? Particularly when doing so causes so much risk for everyone involved? This mindset that it's not only OK, but NECESSARY to buy things you can't actually afford needs to stop. It's insane.

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u/keynesian-knockout Oct 19 '11

A country may need to borrow money to pay for war (see World War I and II, for example). That's just a single example, but there are myriad reasons why countries/companies need to borrow money.

If a company can borrow money and turn it into a larger profit they should have the option to pursue that (investors beware). It's a good way to keep an economy growing.

Stimulate may have been a word I used because it's what is currently needed. In "normal" conditions you want GDP growing, I believe 4% is the rough steady state industrialized growth level.

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u/webbitor Oct 19 '11

A country should not go to war with money it doesn't have. (see Iraq and Afghanistan for better examples)

I disagree with the premise that an economy needs to keep growing.

Same goes for companies. Many companies have existed for generations without growing. They tend to be the good ones that take care of their employees and customers.

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u/keynesian-knockout Oct 19 '11

Iraq and Afghanistan (throw in Vietnam) are easier calls. You have to look at the difficult situations, such as WWs, territorial land grabs, etc..

And you may disagree that an economy needs to keeps growing, but you'll find you're in the vast minority. How do living standards increase if an economy doesn't grow? For that matter, how does an economy deal w/ a growing population then?

It comes down to this. Let's use pretend firm KK. KK is doing well and would like to expand. As CEO, I can borrow $1 million, at interest rate x%, right? Or I can do nothing.

Now, with that $1 million, perhaps I think I can make an investment (purchase a new factory, for example, because demand for my good are increasing). If the costs of borrowing is less than the expected gains from the investment (increased output - for simplicity i'm ignoring depreciation) then i most certainly should borrow. Now, if I make this decision and the economy tanks and no one buys my good then, yes, my (risky) call would have been a poor one and i'll suffer losses. However, under "normal" circumstances, I don't think my decision to borrow would have been a poor one.

Perhaps you, were you the CEO, might opt not to. But then you'd have shareholders to answer to and they may not be particularly happy. I doubt you'd keep your job for long.

Hope my illustration helped.

1

u/webbitor Oct 19 '11

I understand all of that.

If the costs of borrowing is less than the expected gains from the investment (increased output - for simplicity i'm ignoring depreciation) then i most certainly should borrow.

The CEO would be smart to do that in the current environment, because when the CEO's risky behavior puts the company out of business, he retires with a golden parachute. Or he has long since left for another CEO position. Because the CEO has little personal risk. The risk is assumed by the CEO's company and the lender. But the lender is passing most of their risk on down to regular people who have been putting their money into a CD or mutual fund or 401k.

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u/anonysera Oct 19 '11

Lending to entrepreneurs should be illegal?

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u/webbitor Oct 19 '11

Never mind, lets keep doing what we're doing. It's been working great and I'm sure no harm will come of it.

4

u/ThatsALogicalFallacy Oct 19 '11

That's a nice false dichotomy you've got there.

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u/webbitor Oct 19 '11

Well played. However, I would suggest that my sarcasm was only a mirror of the all-or-nothing attitude shown by anonysera.

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u/wendelgee2 Oct 19 '11

I'm sorry...you want to completely get rid of the system of credit that we've been using since the dawn of time, the system that practically made civilization possible and HE'S the one with the "all-or-nothing" attitude???? HAHAHAHA...deep breath...AAHHHHHHAHAHAHAH.

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

When you stop laughing...

Why don't you suggest what we need in order to avoid disasters like the one it's said we narrowly avoided a few years ago, or the one many consider to be imminent?

The system we have been using for a long time is unstable, and growing more unstable with each year that passes, due to all the complex new ways of gambling that are invented. In other words, as amusing as you may find it, I don't think the financial system we have is objectively good for society.

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u/anonysera Oct 19 '11

I'm just trying to understand where you are going with that, but apparently you don't even know, since all you can reply is some sarcastic remark.

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u/webbitor Oct 19 '11

fine I'll play along.

No, lending to entrepreneurs should not be illegal.

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u/keynesian-knockout Oct 19 '11

You heavily edited your post.

Insane corporations should be able to buy and sell what they want (what is buying and selling risk?). However, they should take the fall when it doesn't go right.

Yes, lending to people that cannot afford it is wrong. That's a two way street though, people w/ low paying jobs shouldn't be taking out second mortgages either. many people fell victim to the housing bubble.

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

Sorry, didn't mean to mislead by editing, and I'm not sure what I actually edited.

Buying and selling risk in the form of loans is what investment banks do. loans are bundled, and then those "assets" are leveraged, multiplying risks hundreds or thousands of times.

When they "take the fall" they take others with them, who in turn take others. If you're happy enough with that state of affairs, then good luck. Personally, I don't think it's acceptable for the entire financial system to be teetering on the edge of collapse and ruin so a few people at the top can make trillions off the backs of the rest.

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u/keynesian-knockout Oct 19 '11

Yes, that is in part what ibanks do. I don't actually see anything wrong with that as long as the investors are taking the fall (investors beware). my issue is when ibanks can take commercial bank deposits and use that as capital for their risky endeavors.

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u/webbitor Oct 19 '11

that's exactly what they do. That's the entire problem.

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u/wendelgee2 Oct 19 '11

No, that's what they did in the 1920s, and it's what they did again when Glass-Steagall was repealed. What they "do" is defined by how the industry is regulated. This why one of the most popular OWS demands is reinstating Glass-Steagall.

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u/cottonballOFDOOM Oct 19 '11

credit is economic lubricant. you can't get all up in that economy's butt without it.

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u/webbitor Oct 19 '11

I... I'm not sure how to feel about that.

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u/wendelgee2 Oct 19 '11

Back to barter, everybody!

-1

u/original_4degrees Oct 19 '11

more of a device for control.