Why do we have to save the banks?

We shouldn't save anyone. Incompetent businesses should go bankrupt.

You're kidding aren't you?

I'm not for saving the businesses but I don't agree that they should go bankrupt.  I just think that we would be a whole lot freer without the banks and without the banks people would be forced to be more responsible with the money they have.

 

I don't know.  But I don't see why we absolutely HAVE to save them.

You have to restore confidence in the banking system, and the only way to do that is by allowing the incompentent banks go out of business.

its not the case that any people 'have to do' anything, unless they have voluntarily obliged themselves in that regard.

there are certainly things people have to avoid doing. as far as bad banks go, that means bankruptcy.

We (citizenry and government) DO NOT HAVE TO SAVE BANKS OR ANYONE ELSE.  It is bad economics and even worse, a handful of powerful banks that are enticing government to attempt to do it.  The core issue is that the whole regulatory and banking business structure has been shown to be unfeasible and is in the process of being rejected by consumers.  The current response is to divert resources to the old business structure in the hope that consumers change their preferences.  Government, think Japan, may have to wait quite a while for this system to recover and consumer preferences to change.

The better solution is to let existing structures to handle failed banks do their job and pay off depositors allowing the whole system to bottom out.  Will there be dislocation and poverty, YES.  But the resource allocations that are failed and are causing the poverty have already taken place.  The market is simply attempting in a harsh manner to remove these mis-allocations.  Then other businesses will buy or enter the business a new banking system can start growing.

The best solution is to let the existing structures do their job and once complete destroy the existing structures and have consumers and banks on their own.

 

The Compound Interest Paradox is the key.

If too much credit is being destroyed by a series of bank failures, there's the possibility of a hyperdeflationary bankruptcy spiral that would entirely wreck over-leveraged Western economies. Central bank currencies are essentially debt; debt is the fuel of a fiat paper money economy. If too much debt is being pumped out of the system, repaying interest/loans becomes increasingly hard due to deflationary tendencies, thereby causing even more bankruptcies and so on.

Basically, what we now witness is the theoretical argument against debt as money in action.

Sphairon:

If too much credit is being destroyed by a series of bank failures, there's the possibility of a hyperdeflationary bankruptcy spiral that would entirely wreck over-leveraged Western economies.

Is that sarcasm ?

Juan:

Is that sarcasm ?

No, it's the nature of a fiat money empire. Once the first 100 dollars per 5 percent interest leave the central bank, there's a void of 5 dollars to be filled. More debt money is necessary to repay an existing loan which will create another loan to be repaid. In the meantime, additional loans will be created that originate at the central bank and are distributed by normal banks. Over time, the overall amount of interest payments cannot be covered by new credit because demand for credit is too low. But if no new debt enters the market, the debt spiral comes to a shrieking halt and reverses, thereby wrecking leveraged businesses and individuals.

I don't see the sarcasm here?

I'm not sure I see your point.

Are you implying that banks should be saved in order to avoid "a hyperdeflationary bankruptcy spiral that would entirely wreck over-leveraged Western economies. " ?

Juan:

I'm not sure I see your point.

Are you implying that banks should be saved in order to avoid "a hyperdeflationary bankruptcy spiral that would entirely wreck over-leveraged Western economies. " ?

I'm saying that fiat paper money creates a problem that can only be postponed by employing absolutely undesirable and outrageous means. I'm not even sure whether hyperinflation can by any decent standards be called "more desirable" than hyperdeflation, but that's what it amounts to. The biggest bubble in world history has basically led us to the brink of the abyss, and we're being sucked into black holes from both sides.

If banks are allowed to fail on a huge scale, this could indeed cause a "credit crunch" which wrecks our debt-based economy. Bailing out these banks, on the other hand, may result in hyperinflation which wrecks currency and savings.

So, what are we supposed to do? Abolish the Fed! As soon as possible. Only then, true recovery can begin.