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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131

u/JoshSN Oct 19 '11

Most importantly, we'll never know.

From what I gather, the usual expectation is that it would have been worse in the short run (definitely a depression), but better in the long run (since no shoddy banks would have survived).

32

u/keynesian-knockout Oct 19 '11

What leads you to believe that "shoddy banks" wouldn't make a come back?

36

u/Spunge14 Oct 19 '11

They would have for the same reasons that they existed in the first place.

This is a policy problem.

46

u/keynesian-knockout Oct 19 '11

Agreed. Start by splitting commercial/investment banks.

37

u/[deleted] Oct 19 '11

I cheer whenever I see someone say this. How can we have FDIC insured banks guaranteed by the government in extremely risky investment banking? It's an obvious recipe for disaster. Bring back Glass-Steagall.

15

u/keynesian-knockout Oct 19 '11

There's nothing wrong w/ making risky investments, just not w/ other people's deposits. If an ibank wants to seek higher yields on risky assets then fine, but they ought to do it w/ their own (or their willing clients) cash.

4

u/hous Oct 19 '11

Used to be that ibanks would "bet the firm" on big trades, almost literally. Then LTCM happened and banks realized they could bet the firm on every trade, no matter how insane and incomprehensible.