Instead Of Bailing Out Broken Banks, Why Not Build New Banks?

from the thinking-out-of-the-box dept

Plenty of people are pretty angry about the financial bailout, where it often looks like taxpayers are effectively handing over money to banks who screwed up big time by betting excessively on high risk investments, and borrowing a ton of money in the process. However, the argument from the other side (which does make sense) is that the "alternative" could be the collapse of the global financial system, and that would have such far reaching impacts that it's not at all desirable. But, that assumes the only options are to either bailout the banks or to let them fail entirely. Some are trying to come up with other options. Salman Khan and David Leinweber have come out with a suggestion that instead of bailing out banks, the government should take the $700 billion and use it to fund an entirely new financial sector. Then, as the screwed up banks fail, these new banks can take over their discarded assets.

This certainly has some appeal. The idea is that you wouldn't be rewarding shareholders in the original banks and also wouldn't be allowing the entire capital engine to seize -- and, on the flip side, you also might be rewarding the shareholders of the new banks (the American taxpayer). However, there's also tremendous risk in doing this. In effect, it's something like building a new airplane from within a troubled airplane that's flying at 40,000 feet, getting it to fly from the air, and then moving people from the troubled airplane to the new one. There's an awful lot that can go wrong. Also, in doing this in such a rapid fashion, when it's still not entirely clear what all the root causes of this crisis are, you run the risk of simply transferring the core problems to these new banks (basically taking the problems from the first airplane to the second, if we continue the analogy). Then you end up spending $700 billion to basically create a new set of troubled banks that are even more confusing, because they were put together in a rush. So, while it's an interesting idea, it seems like it would present some significant problems as well.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    Anonymous Coward, Nov 13th, 2008 @ 1:46pm

    what about credit unions

    I haven't heard anyone complaining about them failing, needing massive bailouts or whatnot. It is an already established institution, with profressionals already trained in fiduciary measures. Why couldn't we use the $700 to form a national credit union using employees of current credit unions (or merging whole institutions)?

     

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  2.  
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    Anonymous Coward (profile), Nov 13th, 2008 @ 2:02pm

    Unconvinced

    I remain unconvinced that letting the entire economy fail is that bad of an idea.

     

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  3.  
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    some old guy, Nov 13th, 2008 @ 2:19pm

    corruption

    I thought the reason was rather obvious: Corruption.

    Why else would politicians do the exact opposite of helping their constituents?

     

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  4.  
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    Anonymous Coward, Nov 13th, 2008 @ 2:23pm

    If it doesn't work...

    I gots a backup plan i like to call the Amero, which you'll love.

     

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  5.  
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    SkepticbyNature, Nov 13th, 2008 @ 2:35pm

    Unbelievable!

    Are you folks for real? Total, Complete, Lunacy! You have demonstrated an almost complete lack of comprehension of the problem. The suggestion of simply "building" new banks, is like thinking you can still get a drink of water at home, after the city shuts off the water supply to your house, by simply using a differnt faucet. Unbelievable!

     

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  6.  
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    Anonymous Coward, Nov 13th, 2008 @ 2:38pm

    The Tower:
    With Mars as its ruling planet, the Tower is a card about war, a war between the structures of lies and the lightning flash of truth. The Tower, as Wang points out, stands for "false concepts and institutions that we take for real." When the Querent gets this card, they can expect to be shaken up, to be blinded by a shocking revelation. It sometimes takes that to see a truth that one refuses to see. Or to bring down beliefs that are so well constructed. What's most important to remember is that the tearing down of this structure, however painful, makes room for something new to be built.

    Isn't it time to just let failed buisness fail and create businesses with integrity that won't steal all the money it can from its customer only yo cry later that they have no money.

    STOP PAYING EXECS MULTIMILLION S FOR WORKING IN A FAILED BUSINESS! DUH!

    I say give that money to the people and advertise the importance of consumer integrity and not give one cent to these companies corps etc that continue to destroy our way of life. The constitution says ...

    "For the people" Not for the corporations!

    POWER TO THE PEOPLE!

     

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  7.  
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    Joe Smith, Nov 13th, 2008 @ 2:54pm

    Bank run

    Who exactly is it that would build and operate these new banks? How long would it take to get them up and running?

    The problem for a lot of the banks is not that some assets have a low value but that a lot of assets have an unknown value. The result is a good old fashioned bank run. It makes sense for the government to lend money to the banks (including investing by preference shares) to tide them through the bank run. That way, most of the existing banks survive and the ultimate losses will fall firstly on the common shareholders.

     

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  8.  
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    Anonymous Coward, Nov 13th, 2008 @ 3:36pm

    i for one think the bail out is a huge mistake, and keep saying this will come back to haunt the American ppl and perhaps the rest of the world (since this has become a global economy).

    Plus as far as i see its rewarding irresponsible behavior, some of the people responsible should be sent to jail, instead there are being handed 700 billion dollars (i keep wondering how much that money could do in the 3rd world countries for example)

    but i do wonders how many innocent people will loose there life savings because the institutions they trusted just failed them.

     

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  9.  
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    Bob, Nov 13th, 2008 @ 3:41pm

    Analogy

    Although I don't agree with your airplane analogy at all, it is thoroughly entertaining!

     

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  10.  
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    Nobody, Nov 13th, 2008 @ 3:48pm

    Re: Unconvinced

    You actually bring up a pretty interesting point. Enlightenment-era economist/philosopher Adam Smith, the father of the free market, would say to keep the government entirely uninvolved and have the banks fail, so that they wouldn't make the same mistakes the next time. What do you think about that, Mike?

     

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  11.  
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    bob, Nov 13th, 2008 @ 3:51pm

    Stop The Madness

    Here today we sit and preach Jeffersonian Ideas.
    Yet we live in an economic system put in place by Hamilton.
    I say let us be true Jeffersonians. Allow the system to collapse then hold the people accountable and build a proper Constitutional system from scratch.
    The international banking interests will be fine and in a year or two so will we.
    It's like the the car companies, they allowed costs to continue to increase and now want a hand out from me and you.
    I say NO! Let them fail, a new group of auto companies will rise from the ashes. With out the unions that killed them.

     

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  12.  
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    Jeff Whitley, Nov 13th, 2008 @ 4:18pm

    Bail out

    Who are we bailing out exactly? If the money is to stimulate the economy, then give it back to the ones who gave it in the first place, or a portion of it anyway.

    I'm completely confused, if your business is in bad shape get the "stimulus refund" back to businesses. Then the regular joes of the US get a smaller amount as before.

    Why should a select few, who are deemed worthy by gov. officials of questionable moral character a best, decide the out come. For those businesses who have a very poor understanding of how to handle funding, won't mention any names, cough AIG, let them go out and be forgotten.

     

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  13.  
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    Mike (profile), Nov 13th, 2008 @ 4:18pm

    Re: Unbelievable!

    Are you folks for real?

    Yes, in fact we are. Are you?

    Total, Complete, Lunacy! You have demonstrated an almost complete lack of comprehension of the problem

    Let me explain how this works. If you disagree with us, you present *reasons* why so that we can discuss. If you simply insult us, we have to assume that you don't have any actual reasons behind your claims.

    Secondly, it was not me who came up with the idea. I was simply pointing to a paper on the idea. If you'd like to argue against that idea, go ahead. But, at least try doing so with some actual facts and reasoning.

     

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  14.  
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    Anonymous Coward, Nov 13th, 2008 @ 5:14pm

    Re: Re: Unbelievable!

    Mike,
    Why should he have to explain your ignorance to you? How about you explain how much this new banking system will cost?

     

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  15.  
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    Tom The Toe, Nov 13th, 2008 @ 5:27pm

    Let them Fail

    The deposits of the common investor are insured by the FDIC. The Feds would rather give the money to incompetent bankers than to the people that put their money in the bank. Let the bank fail give the money to the investors (depositors)they will decide what is best to do with their money. It's like a drug dealer has smoked up all his crack and now has nothing to sell and the cartel is going to give him more crack to smoke and get nothing in return. Yeah that always works.

     

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  16.  
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    Mike (profile), Nov 13th, 2008 @ 5:30pm

    Re: Re: Re: Unbelievable!

    Why should he have to explain your ignorance to you?

    If you call someone ignorant, without showing how they're ignorant, I can assume that you are simply throwing out insults without any basis.

    How about you explain how much this new banking system will cost?

    Uh, why don't you try rereading the part where this was not my suggestion, nor was it an idea that I supported. Ah, but why let facts get in the way of a chance to insult?

     

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  17.  
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    Little kid on the street, Nov 13th, 2008 @ 6:04pm

    Maybe its not about any of this

    Simply put,
    people don't like the idea of Socialism unless it benefits them directly.
    What the government is doing right now is socialist. Down to the very core, taking the peoples money and redistributing the wealth to those who are in "need" is socialist.
    Although we are a Republic, not a democracy, we need to understand the bigger people.
    What the people want, the majority, is a bailout.
    Save GM, for christ sakes they have a brand new Chevy Volt coming out pretty soon. I say in 2 years they will be roaring.
    But, without a bailout we won't know.
    I pity the automakers, because without them, no one in america would build cars.
    That's so many jobs we would lose, then what? Does the government have to have another FDR and his alphabet soup? Hopefully not. Yet, the bankers, they should be brought to court ( I think they already have) and then take the laws that mandated some of them to be able to persuade the whole economy like this and fix them.
    We either have too much control on the law, or too little. It's just the way you look at it, but either way,
    It's not enough.

     

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  18.  
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    Lawrence D'Oliveiro, Nov 13th, 2008 @ 6:13pm

    It All Boils Down To Home Loans

    The basic problem, as I understand it, is home loans. By all means let the existing financial institutions collapse, but then it gets much harder for Joe and Jane Sixpack to get a loan to buy their home, or to pay off their existing loan. That makes Joe and Jane Sixpack angry. And when they get angry, they tend to vote out the Government. So that's why the Government (of whatever ideological persuasion) ends up bending over backwards to bail out these financial institutions. Because no matter how doctrinaire they may be, they're not prone to committing political suicide.

    So if you create an all-new financial system, where's the guarantee that it will continue offering home loans to Joe and Jane Sixpack? And if it doesn't, then what's the point?

     

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  19.  
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    Anonymous Coward, Nov 13th, 2008 @ 6:21pm

    Instead Of Bailing Out Broken Banks, Why Not Build New Banks?

    Because that does not solve the basic issues associated with banking and financial.

    The first issue is what is money. Prices were relative stable from 1830 to 1930. Money was gold and silver. Expansion of the money supply was by finding new minerals ie gold and silver. There are no more great treasure boxes like the North and South American continent that have a supply of minerals sufficient for gold and silver to provide the increase in money with price stability to keep up with world population growth. The second issue with gold and silver is that the benefits of an increase in supply which means an increase in money supply do not fall on the population at large but on a small section of the population which finds the additional treasure. One of the big issues of the great depression was that there was insufficient liquidity in the country for normal daily transactions. The solutions to these was fiat money ie paper back by nothing but the belief that money had value.

    Fiat money opens the door to another set of problems. Politicians have discovered that goods can be paid for by the mere printing of money. Bankers have discovered how to print money where the benefits of printing money go to the bank. These issues explain why inflation world wide has increased slowly but at an increasing rate. Money of course when one speaks of real money is not just paper money but includes any thing that can be converted into paper money. In that definition a house is just as much money as paper money as the house can be converted to paper money and traded for other goods with or with out conversion directly to paper money. This whole issue is a very difficult subject in which one can get a number of PhD specializing in one aspect or the other which implies this explanation is not fully correct since a full and complete coverage of these issues would require numerous books we are going to stop here.

    The second issue is that a bank is not a normal profit making business but is being ran as one. Banks are a store of wealth for people and business and a means to provide liquidity for economic transactions. The issue here is that people are depositing the hard work into banks in the form of money which for most people really represents hours of work but is being used by the banks as the bases of a giant gambling enterprise similar to any gambling game found in Los Vegas

    The third issue associated with finance and money is that there is good reason to suspect that both the great depression and the current financial situation were not natural events but were artificially induced. For the great depression the inducement could have been by one or both of two parties. Communist intent on collapsing the world order to bring about a world wide communist utopia or German nationalists with intent of trashing the pay out previsions of the Treaty of Versailles. Significantly neither party got what they wanted. As far as the current situation with only the vaguest of suppression that is not a subject that one may politically discuss in an open form. Suffice it to say if suspicions are correct then as with most conspiracies the results was a colossal failure. One final aspect of this is that the third aspect really is about the military national security aspects of money and given the form of events for the last 6 months makes a lot of scene

     

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  20.  
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    Anonymous Coward, Nov 13th, 2008 @ 6:28pm

    Re: Unbelievable!

    You are right in that you understand that the previous proposed ideas are to say the least nuts.

    You are wrong in the aspect that you can not insult people and get them to agree with you.

    Also, you may want to consider that in being right you really do not express the depth of understanding of the issue that would allow anyone to understand why the fruit cakes are simply nuts.

    For this one would suggest to learn better anger management.
    Learn to express your ideas better.
    And, learn to develop a better understanding of the issues so that you can the understand what it is you are trying to say.

     

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  21.  
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    Dave (profile), Nov 13th, 2008 @ 8:57pm

    Re: Unconvinced

    I remain unconvinced this is the only option. And why believe the same people who told you how strong the economy was months ago?

     

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  22.  
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    Ferin (profile), Nov 14th, 2008 @ 4:59am

    Ah, Man...

    "something like building a new airplane from within a troubled airplane that's flying at 40,000 feet, getting it to fly from the air, and then moving people from the troubled airplane to the new one"

    I'm gonna spend all day thinking about how to make that work now.

    It is kind of an interesting proposal I guess, but I think you're right that it's too damn risky.

     

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  23.  
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    where have you been, Nov 14th, 2008 @ 5:47am

    Re: what about credit unions

    do you watch the news at all?????

     

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  24.  
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    chris (profile), Nov 14th, 2008 @ 6:54am

    Re:

    there is good reason to suspect that both the great depression and the current financial situation were not natural events but were artificially induced. For the great depression the inducement could have been by one or both of two parties. Communist intent on collapsing the world order to bring about a world wide communist utopia or German nationalists with intent of trashing the pay out previsions of the Treaty of Versailles.

    ahh the bavarian death cult/illuminati/evil world bank/new world order conspiracy theory.

    everyone knows that the nazis were vampire werewolves and that's why they faked the moon landing at roswell.

     

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  25.  
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    A. Smith, Nov 14th, 2008 @ 11:09am

    Truth and consequesences

    The Banks did not do what it takes to succeed. This is a market correction. It's a huge part of a little thing called capitalism.

    In a free market economy, (which, let's face it, we haven't had for at least 75 years, since the New Deal if not longer), companies that do well, grow, survive, thrive, and are profitable. Companies that don't do well die. Survival of the fittest.

    The "poor innocent people" who bought stock in these failing companies knew, (or should have known - if they didn't, it is their own fault for not better informing themselves), that all stock investments carry the risk of complete loss. It may be sad, unfair, heartbreaking, a tragedy, or whatever - but that's life. Some investments pay off - others don't. That's the nature of the stock market.

    The government should not bail these banks out. They should not create new banks. They should let whatever consequences there are happen - including a so-called "Collapse of the world economy".

    Here's something basic to capitalism. People like eating. Not everyone is able to grow their own food. But everyone can do something. People will trade what they have, or what they can do, for what they want, or what they need. This will *always* happen. The dollar can not just crumble, but actually disappear completely - so can the Euro and every other form of currency. But as long as there are hungry people and people with food - capitalism will continue to work.

     

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  26.  
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    IntoTheForge, Feb 4th, 2009 @ 3:29am

    Re: Unconvinced

    Anyone who brings emotional attachment into a competition, i.e., economy, deserves the suffering that results. We'll survive, and this too shall pass, but what springs tomorrow from the ashes of yesterday depends on the soil being tilled and seeds being sown today.

    On the other hand, if what should happen is what is happening, the world would be a different place. Why should it happen, and how should it happen?

     

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  27.  
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    IntoTheForge, Feb 4th, 2009 @ 3:31am

    Re: corruption

    Politics is about the power to shape mankind, not about compassion. Some use power compassionately, but where there's power there's the elite.

     

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