Remember the financial panic of 2008? That was the time when, with the big investment banks teetering on the brink of bankruptcy and a worldwide credit crisis underway, the federal government stepped in to bail out the banks and restore stability to the system.
But was it the right thing to do? For Prager University, economist Nicole Gelinas of the Manhattan Institute argue the case for “no.” In her view, the practice of saving banks “too big to fail,” something begun under the Reagan administration, buys short term peace at the cost of creating a long-term monster: banks that engage in riskier and riskier practices leading to greater instability, secure in the knowledge that Uncle Sam (read: the taxpayer) will bail them out. Like giving an alcoholic a drink to steady his nerves, bailouts only enable bad behavior, they don’t cure it.
Here’s the video. See what you think:
The right thing to do, in my opinion, is to let wayward banks go bankrupt, but handle as the Savings and Loan crisis of the 1980s was handled: federal regulators take over, shareholders and bondholders are wiped out, management is fired, the bank’s assets are redistributed through the normal bankruptcy process, but individual depositor’s funds are protected. This would provide a brake against ever-riskier behavior, instead of shielding bankers from the consequences of their actions.
Of course, this wasn’t the whole cause of the financial crisis: government intervention in the housing market, in the form of encouraging bad lending practices and selling risky mortgages as government-backed securities played a huge role, too.
Hmmm…. Government intervention causes a problem. I’m detecting a pattern here.
PS: A good book on the crisis is “Reckless Endangerment,” by Morgenson and Rosner.