http://finance.yahoo.com/news/bank-regulators-gain-ground-against-054431339.html
I found this article relevant to the class because we recently discussed spending multipliers and how banks affect them. In my opinion, this is an interesting story because regulators are trying to convince banks they should not depend on a rescue plan, or "bailout", if they run into trouble again. On one hand, it's great to see more accountability, but it could also be dangerous if the failure of multiple big banks leads to a drastic reduction of the money multiplier.
The problem here is that some companies actually believed they were too big to fail. A basic principle of capitalism is that when one company faulters, another will rise to take its place.
ReplyDeleteBanks that are 'too big to fail' should be broken up into smaller institutions in my opinion. If they are so big they cannot fail, then they are way too big in the first place. These banks are dangerous because of moral hazard. They are able to leverage their high risk investments with the fact that they will always have an escape route if things go badly. They either need to be broken up or regulated extremely strict. In some cases too big to fail is acceptable. If the company is worth preserving and is going under due to a stroke of bad luck and is way too connected with our economy, then by all means bail them out. But when they are selling sub prime mortgages to people they know will never be able to pay them back, then let them fail. Another institution will rise and take the place and I guarantee you they won't make the same mistakes.
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ReplyDeleteI don't believe the banks should be broken up, but I absolutely do believe that they need stricter regulating and constant observation. However there is a reason that these banks are 'too big to fail' and its a very important one. A lot of people don't realize that if these banks did indeed fail then that could quite possibly lead to the collapse of our financial system or at least a very costly blow. I also agree with Sunzu that even if one bank is taken away that another will just rise to its place.
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