Why Should We Save Big Banks?
Question/Comment: I am a traditional liberal democrat who is in favor of a large stimulus package that focuses on job creation and helping out states. I can not understand the need for further bank bailouts. I do not understand the concept of too big to fail. If there are 10,000 financial institutions in this country and 2,000 are insolvent; why not let the other 8,000 that were more prudent take over the business of the 2,000 that are insolvent? Can you explain to me the argument for saving the big banks, their executives and their shareholders at taxpayers expense instead of allowing successful banks to take over their business?
Paul Solman: The argument saving the banks is that without them, the whole system freezes. See our story on the domino effect for one account. Look at what happened when Lehman Brothers was allowed to fail for a real-life example.
In retrospect, Lehman seemed “too big to fail” because when it DID fail, the consequences appear to have been catastrophic. “Too big” means the institution has too many promises out there that, if reneged upon, would bring down too many other institutions with whom they did business.
As to the argument for saving executives, it’s that we need the best and brightest (and most knowledgeable) to run banks. I would venture to say this argument isn’t playing well in Peoria at the moment, or perhaps anywhere outside a psychiatric ward.
As to the shareholders, the argument is that if you wipe them out, you won’t get MORE investors to come in to help the government foot the bill, and revive the system. They’ll be afraid of getting wiped out too.