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What Does "Too Big To Fail" Mean?

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Karmakin Moar and Moar and Moar Since: Aug, 2009
Moar and Moar and Moar
#27: Feb 18th 2011 at 7:00:04 AM

^Yeah pretty much.

The main stated reason that we couldn't let the banks just die is that too many other businesses relied on short-term loans/lines of credit in order to function, and without that service they'd have to close down too. My solution would have been to open a government run service for businesses to provide that on a short-term basis, but that's just me.

But this was what you get when you encourage speculation over investment. And nobody in government seems interested in changing this balance.

Democracy is the process in which we determine the government that we deserve
EnglishIvy Since: Aug, 2011
#28: Feb 18th 2011 at 7:02:37 AM

Don't we have the FDIC for that very purpose, of taking over failed banks?

Deboss I see the Awesomeness. from Awesomeville Texas Since: Aug, 2009
I see the Awesomeness.
#29: Feb 18th 2011 at 7:27:45 AM

You're complaining that credit cards exist?

Fight smart, not fair.
DrunkGirlfriend from Castle Geekhaven Since: Jan, 2011
#30: Feb 18th 2011 at 8:06:19 AM

[up] I dunno about who you're asking, but I reeeeally dislike having to go through a credit check as a prerequisite to employment.

"I don't know how I do it. I'm like the Mr. Bean of sex." -Drunkscriblerian
neoYTPism Since: May, 2010
#31: Feb 18th 2011 at 8:23:37 AM

"While the idea of the government intervening in a free market to "Cut down the tall poppies" leaves a really bad taste in my mouth, I can't get around it being an ugly necessity to keep a market as free as it possibly can, given the nature of its participants." - Tibetan Fox

This. If anything, an Ironic Echo of market-worshippers' classic "socialism works in theory, not in practice!" line might arguably apply to laissez-faire capitalism itself. (Albeit in a different sense, one that goalpost-moving market-worshippers might "define" as "that works" but then again they're beyond reasoning with anyway.)

EricDVH Since: Jan, 2001
#32: Feb 18th 2011 at 8:28:48 AM

^^^Yes, they're based almost entirely around sociopathic business practices. Guess what the industry jargon for credit card owners who pay off their balance each month before interest kicks in is? Deadbeats. Since people responsible enough to use them correctly don't actually need the borrowing ability, and people who aren't are in grave danger merely by being allowed to get one, the things should be banned and replaced with debit cards.

Eric,

edited 18th Feb '11 8:30:00 AM by EricDVH

Deboss I see the Awesomeness. from Awesomeville Texas Since: Aug, 2009
I see the Awesomeness.
#33: Feb 18th 2011 at 8:33:19 AM

Why? The only people in danger are the ones who can't control themselves, it'd be no different than banning gambling because people lose enough to get into debt.

Of course, you probably think we should go back to the gold standard since debt is bad.

edited 18th Feb '11 8:38:33 AM by Deboss

Fight smart, not fair.
EricDVH Since: Jan, 2001
#34: Feb 18th 2011 at 10:46:15 AM

Debt is good and useful in limited quantities, but the interest rates, fees, and penalties most instruments have are totally out of line. Credit cards are simply the most ridiculous example, since they're essentially a convenient form of pocket money… That magically turns into a horribly overpriced loan if you use it wrong. It's somewhat like having a frag grenade built into your cellphone.

Eric,

breadloaf Since: Oct, 2010
#35: Feb 18th 2011 at 10:47:35 AM

One thing I've been wondering is if we should have a state bank, at arms length from the government, to compete with private banks. We've already central banking (except USA) to handle our currency, I'm not entirely sure what the point of private banks are anymore. I'd like to keep them around for now and just throw a crown bank into the mix to see if it improves the situation because in the end, it's the government that insures our bank accounts, it's our tax dollars that bail out failing banks... what is the point? Banks succeed, they take our money. If they fail, they take our money. Why not just run it via the state and have private banks around just to keep it honest.

TibetanFox Feels Good, Man from Death Continent Since: Oct, 2010
Feels Good, Man
#36: Feb 18th 2011 at 11:32:11 AM

I heard an interesting report on NPR once about the banking situation that explained the whole "Why doesn't the government just nationalise the banks?" question.

The short answer is that it literally can't - it doesn't have the manpower. The government had enough staff to be able to handle ONE major bank needing to be taken over by the government. When Lehman Brothers went down, the government's human resources were already being pushed to the limit.

This isn't too surprising when you think about it. For the government to have been able to take over the entire banking system, there'd have to be two redundant sets of banking employees. One hired privately running the banks, the other spending most of their time sitting around with their thumbs up their asses at taxpayer's expense.

The government nationalising even one major bank is considered a pretty extreme scenario, so it wasn't deemed necessary to have the staff to do anything more than that. There's a limit to how extreme a scenario one can adequately prepare for before the expense becomes outrageous.

So what's happened with the bailout is a kind of compromise situation. The "bailout" isn't just free money from the government - it comes with strings attached and the government is now a major shareholder of a lot of the major banks. They don't have direct control, but now they have the power to kick out directors they believe are causing trouble, call emergency meetings etc.

RadicalTaoist scratching at .8, just hopin' from the #GUniverse Since: Jan, 2001
scratching at .8, just hopin'
#37: Feb 18th 2011 at 1:13:50 PM

Which they'll never do because they rely on the SEC to tell them whenever something's wrong and the criminals own the SEC.

Share it so that people can get into this conversation, 'cause we're not the only ones who think like this.
EnglishIvy Since: Aug, 2011
#38: Feb 18th 2011 at 1:22:43 PM

What about splitting up the banks, using antitrust laws?  *

If they're not nearly as colossal, then taking them over when they fail shouldn't be a problem.

edited 18th Feb '11 1:23:26 PM by EnglishIvy

DrunkGirlfriend from Castle Geekhaven Since: Jan, 2011
#39: Feb 18th 2011 at 1:33:34 PM

Washington has several credit unions, which are pretty nice. I do my banking through one of them, and they never came close to crashing when the rest of the big banks did.

"I don't know how I do it. I'm like the Mr. Bean of sex." -Drunkscriblerian
TibetanFox Feels Good, Man from Death Continent Since: Oct, 2010
Feels Good, Man
#40: Feb 18th 2011 at 1:42:12 PM

A lot of the "Why didn't they use X Powers?" questions have the same answer. The government was terrified of destabilising the economy further.

Government emergency intervention in the financial system is basically a Dangerous Forbidden Technique. Using it creates uncertainty, because it disturbs the status quo and has everyone asking "Well, what prior assumptions about how things work are going to be overturned next?". People invest more when they feel that assumptions on past behaviour and outcomes are likely to be accurate in predicting future behaviour. The more the government intervenes in an economy, the less certain it is that any given investment strategy is going to work and people start pulling their money out and hiding it under the proverbial mattress.

That's bad.

The sort of powers you guys are mentioning are pretty much considered to be Godzilla Threshold stuff. Fortunately, things didn't get that bad this time, in part because said powers weren't used recklessly. Yes, it sucks that there's a shit-ton of Karma Houdinis out there, but putting them in jail would have involved a lot of collateral damage to small folk like you and me. Sucks, but that's how life is.

EnglishIvy Since: Aug, 2011
#41: Feb 18th 2011 at 2:10:51 PM

A case could be made- very, very easily be made- that since these investment strategies pretty much revolve around creating another bubble, that they should not be seen as an inherently good resource that must be protected at all costs.

Also, I seem to recall that in late 2008, people were panicking that the entire global financial system was going to come down, and that the bailouts themselves were Godzilla Threshold stuff. Since they only worked in the sense that it got people's minds off of the situation, next time  *

, a somewhat different tack is called for, yes?

edited 18th Feb '11 2:14:42 PM by EnglishIvy

RadicalTaoist scratching at .8, just hopin' from the #GUniverse Since: Jan, 2001
scratching at .8, just hopin'
#42: Feb 18th 2011 at 2:22:51 PM

To build off of what Ivy's said, if you're arguing that the extreme measures shouldn't be taken when the economy is vulnerable to stability, then that means we should take them as soon as the economy is sound.

Accordingly, it becomes in the interests of those profiting from the status quo to ensure the economy never becomes really sound.

edited 18th Feb '11 2:23:15 PM by RadicalTaoist

Share it so that people can get into this conversation, 'cause we're not the only ones who think like this.
comodapoltrona Since: Dec, 1969
#43: Feb 18th 2011 at 4:40:28 PM

Too big to fail means someone has friends in high places.

Dagobitus Since: Aug, 2010
#44: Feb 18th 2011 at 5:06:19 PM

Too big to fail means that Bankers are richer than us Peasant Scum, which proves that they are blessed by the One True God and are morally superior to us Peasant Scum. Therefore Bankers deserve obscenely huge bonuses and the function of the State is to tax us Peasant Scum to pay those bonuses. That's logical, Captain.

Deboss I see the Awesomeness. from Awesomeville Texas Since: Aug, 2009
I see the Awesomeness.
#45: Feb 18th 2011 at 5:19:45 PM

Do you guys actually want to have a discussion or are you just wanting to turn this into an IJBM?

Fight smart, not fair.
TibetanFox Feels Good, Man from Death Continent Since: Oct, 2010
Feels Good, Man
#46: Feb 18th 2011 at 11:09:02 PM

Chill, Deboss. These guys don't know much about finance and economics but they're showing a willingness to learn.

Unfortunately there's no way for me to succinctly describe how deep this goes. This stuff is so complex that even I can barely understand it because I never specialised in finance. The best analogy I can find is that whenever you try to change the rules of financial regulation you're playing a game of Jenga. And you're advocating drawing out pieces that are very low on the pile. There really isn't a good time to do that.

Go read the trope Godzilla Threshold again, it means "Things are so fucked right now that it's almost impossible to make it worse". I can tell you, it can get worse than it is right now. Much worse. Go enter the words "Panic of" into Wikipedia if you're looking for some unsettling bedtime reading. Unfortunately the banking system goes to hell about once every 20 years. It's been a cycle you could damn near set your watch by with the exception of the late 30s till the Savings & Loan Crisis in the early 80s. Don't really know what caused the cycle to miss a beat that time.

Each time it happens, we build on past experience to find ways to make it a little less bad when the shit in the banking system hits the fan. Most of the stuff you guys are talking about has already been tried a long time ago and was found to work extremely poorly compared to the sort of stuff being done now. That's the reason it doesn't get brought up very much by the finance boffins. Satisfying as it is to round up all the crooked bankers and make an example of them, No One Has A Memory Over Two Years Old so it doesn't actually work for very long. It's a depressingly short period of time before the next generation of Gordon Gecko wannabes will have forgotten all about it and start making the same mistakes. Birds fly, cats chase string and bankers simply cannot resist the temptation to shit in their own nest. It just seems to be an innate behaviour and the focus in recent decades is on reducing the damage caused by it.

EricDVH Since: Jan, 2001
#47: Feb 18th 2011 at 11:59:11 PM

Funny, it seemed to work peachy keen for FDR.

Eric,

TibetanFox Feels Good, Man from Death Continent Since: Oct, 2010
Feels Good, Man
#48: Feb 19th 2011 at 12:33:37 AM

Oh Jegus you have no idea. The nastier aspects of the New Deal (in particular, the National Recovery Administration) have been largely forgotten. If they tried bringing that shit back I bet you'd all be screaming "FASCISM!" at the top of your lungs.

The bits of the New Deal that worked were kept. The bits that didn't were forgotten, you don't want those bits coming back.

edited 19th Feb '11 12:36:37 AM by TibetanFox

RadicalTaoist scratching at .8, just hopin' from the #GUniverse Since: Jan, 2001
scratching at .8, just hopin'
#49: Feb 19th 2011 at 6:14:42 AM

Most of the stuff you guys are talking about has already been tried a long time ago and was found to work extremely poorly compared to the sort of stuff being done now.
When was this time that we actually enforced antitrust laws and gave the SEC teeth, and was it so very horrible for the economy?

I would argue that any economic system that goes to hell once every few decades needs substantial bottom-up reform.

edited 19th Feb '11 6:14:52 AM by RadicalTaoist

Share it so that people can get into this conversation, 'cause we're not the only ones who think like this.
SilentStranger Trivia Depository from Parts Unknown (4 Score & 7 Years Ago)
Trivia Depository
#50: Feb 19th 2011 at 7:33:22 AM

The sad part is, this is going to happen again. And again. And again.


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