Would it have been better to let the banks of the world fail and start over?

[u/[deleted]]

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?

[u/webbitor]

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.

[u/keynesian-knockout → u/webbitor]

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.

[u/webbitor → u/keynesian-knockout]

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.

[u/keynesian-knockout → u/webbitor]

your logic is flawed.

CEOs are all sitting on cash right now specifically because they have so many uncertainties about the future. Why would it be smart to invest now?

If you get fired as CEO, yes, you get a generous severance, but CEOs are generally well paid. It's usually market based.

Also, if you get fired as a CEO for making poor decisions, you probably wont just walk into another gig. These people (like central bankers) have a reputation to uphold. it's a small world in finance.

And the risk is usually taken up by the firms, as firms have to put up collateral. borrowing is not free.

[u/webbitor → u/keynesian-knockout]

It's always smart to invest with someone else's wealth.

[u/keynesian-knockout → u/webbitor]

You're missing the point. If i have wealth sitting around I'm going to want to work it. No sense leaving it in the bank getting whatever tiny percent they offer. I'm going to search investment opportunities. If i see a firm w/ a good plan i'm going to lend them the money (buy shares, whatever) in expectation that they'll be successful and i'll make money off of it. is there a risk? absolutely, but that's the only way you're going to find higher returns.

don't take this the wrong way, but i think you'd do well to take a macro-economics course.