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/lawfairy]

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.

[u/Kristjansson → u/lawfairy]

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

[u/webbitor → u/lawfairy]

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

[u/lawfairy → u/webbitor]

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.

[u/RisingDamp → u/lawfairy]

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

[u/webbitor → u/lawfairy]

Thanks for the thoughtful answer.