>If 'too big to fail' banks and companies were immediately broken up on commencement of recessions, there would be many less recessions.
I'm curious what the justification for this is. It seems like the kneejerk reaction toward any big/powerful entity (eg. "break up the tech companies!").
Several huge industries have been closed down in the last quarter of the 20th century. Governments were adamant that subsidies absolutely were not available to those industries. Many people have lived in relative poverty for years, in areas with very high rates of unemployment.
And then the banks went into meltdown, because of greedy irresponsible sometimes criminal behaviour; and these were the same banks that were talking about the importance of pure market forces and no government intervention; and these banks were propped up at vast expense to the UK taxpayer; at a time when many well loved public services are being cut; and those same greedy bankers (despite being in position when their banks lost billions and needed support from tax-payers) are taking huge bonuses.
> if it weren't for government the bad banks would have failed in 2008-- and we would have had a real recovery afterwards.
We would - but at the price of a much worse crash. (Which doesn't mean that the result, today, would have been any better - the further down the bottom was, the better the recovery has to be to reach the same point.)
> What made the recession in 2008 the Great Recession was the failure of the Federal Reserve and the Treasury to prevent Lehman Brothers from collapsing. Allowing the collapse of an institution that was too big to fail is what started…
One could argue that the problem started with the market believing there were such things as an institution too big to fail… Or maybe even earlier, when bankers decided they could lend money to any insolvent guy because the risk was going to be born by others through CDS…
> Also, it's odd how the S&L crisis happened before GS was repealed
Not really. The 2000s banking crisis happened not long after banking regulations were repealede, the S&L crisis happened after S&L regulations were repealed. (In both cases, the repeals were justified on the basis that the increased freedom would strengthen the deregulated industry and the broader economy.)
> The best example of this is 2008, where financiers gambled themselves into oblivion, but got bailed out when it went bad.
This is an interesting example, but I think you need to go further in saying that the post 2008 financial system was even more irresponsible than it was before
>Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances.
In theory (if you just leave the crisis to play out) that's what should happen, but in practice it rarely does. Not without the correct political response.
The too-big-to-fails in the US could have been allowed to go bankrupt, but it would have caused a catastrophic economic bottleneck because they have so many counterparties. Following regular insolvency procedures for a small enterprise is complicated enough and can take years as the creditors fight it out among themselves over how to divvy up the remainders of liquidation. Imagine how much of a clusterfuck it would be if half the country was either a creditor or a debtor in some respect. Worse, you wouldn't know if half of the rest of the country was bankrupt or not until you resolved the clusterfuck.
What could have happened was for a temporary nationalization so that the banks could have continued operating in a limited form so as to avoid the bottleneck and give time to tie up the loose ends. This is what Sweden did in the 90s. Their fundamental balance was resolved and they returned swiftly to growth.
When the too-big-to-fails are too politically powerful, however, they just tell the government to make them solvent again and the government promptly does it. Spectacularly bad lending decisions then resume and the power of the heads of those banks increases even more as the cancerous organization grows even larger. The fundamental imbalance has worsened.
I was a bit struck by this:
> I see credit cards as being the saving grace which prevented another great depression during the recent economic collapse.
Partly because the economic collapse was driven by banks allowing high-risk credit on mortgages, loans and credit cards, and thinking they staved off a true great depression is a very weird way to approach it.
> Was the last global financial crisis not caused by idiotically lax lending conditions
No. It wasn't.
The housing market began collapsing in certain states as early as 2006 and many banks had problems then. The wider crisis only happen once the central bank totally misjudged the monetary conditions and let demand collapse.
They were talking about high inflation fears in 2008 when it was clear that NGDP was dropping like a stone (look at FOMC meeting in November of 2008). The real 'Great Recession' meaning the large bank failures and the even most of the housing problems outside of the original crisis states only happened after that.
The effect of bad house lending was visible from 2006 but that should not effect all other industries unless the broader monetary system fails.
> And that was in turn because banks can lend deposits without blocking access to that same money by the depositors?
That is how the monetary system has worked for 200 years. Its hard to explain crisis by this alone.
> However that's not inherently a bad thing. Digging holes in the ground and filling them up again is economic activity, but it's still a waste of time.
You can not just assert that economic activity is wasted without having a story why that should be true. The investment are driven by individuals who want to improve their lives, not dig holes and fill them up.
> Why would it crash hard unless interest rates go up by a significant amount?
The 2008-era crisis in theory should have resulted in a whole heap of financial managers taking their companies bankrupt/to a place of horrid returns and being blacklisted from ever managing a lemonade stand. But they were bailed out, so now they got promotions instead for record returns or whatever it is they've been doing since. Since the finance industry has substantial control over what everyone else does, that leaks out into the real world.
So, the intuition is that the system is being corrupted and people with no ability to make good decisions are being put in charge. At some point that should boil over. You can fit math models to that and guess which metric will blow out first.
I'm not sure how much I buy that argument; people have an incredible ability to put up with suboptimal circumstances. But when you put idiots in charge there is always a risk that they do something spectacularly stupid so my personal guess is at some point the pensions crack and trigger something. It is a spectator sport in a way. Maybe America is productive enough that they can cope with a few bad eggs in the financial markets. Maybe the taxpayers can shoulder all burdens!
My interpretation is that something went wrong with bank regulation in the late 70s or early 80s. That is when the too-big-to-fail snowball started rolling; since then the stresses in the system seem to have been building. 2008 was a nasty blow.
> Finance is a very important industry that adds a lot of value.
perhaps, but
> The great recession after 2008 and the great depression both show what happens when finance stops working.
shows the problem with your comment. The "recession after 2008" is not the problem, the previous 30 years of finance capitalism and deregulation (starting with the mortgage interest deduction and securitization in the late 70s) is.
Justifying our horrendously corrupt system this way -- by pointing to the basic utility in banking, lending and financial instruments -- is like saying McDonalds is great because food is good.
>recent bank failures are a result of the free market running amuck on easy credit and dumb investments (home loans without income verifications)
Easy credit was the deliberate goal of the federal government starting in the early 2000's. There was a very mild recession and the government pulled out all the stops to prevent it from getting worse by subsidizing borrowing to keep interest rates well below free market levels. They killed a fly with a cannon and spawned a giant financial bubble.
In the free market, people that lend money have the incentive to make sure it gets paid back. This calculus becomes complicated when the subjective factor of the government's whims for the credit market is added in.
As far as "dumb investments" go, loans to homeowners were made in the environment of an unprecedented price bubble that was spawned by the loose monetary policy of the federal government. Many "dumb" mortgages are not dumb to make when the value of the underlying collateral is increasing by 30% every year.
I know it is the standard line that we need more regulation, but I don't see how any regulator could have been more inclined to make good decisions in such unprecedented circumstances than the market. In hindsight it is easy to say that the Government should have restricted the supply of mortgages, but this is directly the opposite its goals to increase home ownership. Personally, I wish they would stick to the goal of protecting our rights and property and butt out of everything else.
>The 30s were a lot less regulated and the great depression was a result of a free market moving without any government oversight or interference
I know this is the standard line, but many government actions worsened the Great Depression in the United States and compounded its misery. The two major monetary events of the Great Depression were directly caused by the government - 1) the contraction of the money supply and 2) massive bank failures. 1) was the policy of our wonderful omniscient technocrats at the Federal Reserve and 2) was the result of unitary branching laws and other laws meant to punish "big banks" and prevent them from forming. Anti-bank populism is nothing new in the United States. I don't have the numbers on me, but I seem to remember that the United States (with many anti-bank laws) had thousands of bank failures while Canada (with few such laws) had like 4. The fact is, "big banks" weather hard times easier, and restricting capital flows in the industry make misery for all when unexpected events happen.
On top of that, the government acted to institute a price-floor for labor at a time when prices in general were falling, thereby creating massive unemployment. In an attempt to remedy the deflation caused by monetary restriction, the government burnt food and passed a massive tariff which ended up restricting the supply of consumer goods and food.
The general problem was a fall in the price level. In the Free Market, the price of labor would have fallen to match other goods and business as normal would have resumed. However, the government decided restrict the supply of labor and other goods, like food, to increase the prices of these goods. They succeeded in this, but they did not drive up the general price level. Instead, they increased the price of these goods relative to everything else, causing shortages in both (unemployment and food shortage). Then the government instituted more programs to fix the problems it had caused, including massive government hiring programs, subsidies, and a war. Noone suggests to this day that maybe they shouldn't have gotten their grubby little ignorant fingers so deep into the economy in the first place.
I am not an expert in the Great Depression, just an interested amateur. Still, it is obvious from a cursory glance at the facts that explaining it as a morality tale on the failure of Free Markets is much too simple, although that is the common interpretation taught to High School students. It hurts me to hear the President who presided over the longest, deepest, and most painful depression in US history credited only with "ending it".
> Are we forgetting the inflationary period in the 70s? How the gold standard was lost during this time? All the emerging market crises? How the USD has lost 98% of its value since the 70s? How inequality is sky high due to interest rate suppression causing asset price inflation? How we have a massive trade defect leading to an extremely large negative net-foreign-investment balance? Does it makes sense to you that countries that are much "poorer" than us are lending us money
You’re conflating a bunch of unrelated things. The single most economically devastating type of event in a banking system is a credit crisis or credit collapse [1]. That’s what both the Great Depression and the Global Financial Crisis were.
All these other things you reference pale by comparison in the level of harm they can inflict on society. Are they bad? Sure. Are they remotely in the same league of harm as the GD or GFC? No.
The point of structural banking system regulation is to prevent this worst case scenario, not to solve every single problem with the banking system. If you can prevent credit collapses from occurring then you’ve significantly improved the stability of the banking system.
>Banking is the single most heavily regulated part of the economy. It is fantastic to claim the financial crisis was caused by solely private actors while dropping the governmental context.
Banking might be the "most heavily regulated part of the economy", but the regulations that mattered were also disbanded one by one in the 2 decades leading to the crisis.
The government gave free reign to those "private actors".
Besides government, when it doesn't play its role as being there for all citizens interests, is just a lackey for private interests and powerful lobbies (and, no, "no government" wouldn't be a solution: just more of the problem).
>That crisis—in which Swedish authorities swiftly wrote down bad assets, moved them into a “bad bank” and recapitalised the remaining “good bank”—informed many of the bail-outs in the 2008 financial crisis.
I don't know where this came from. The swedish example was brought up many times during the crisis but always to argue that we should be doing what they did (wipe out the equity) and not what was effectively done (prop up the banks).
Except we didn't allow this for the banks (iiuc), so not everything gets GCd.
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