Too big to fail?

No one is too big to fail – even countries (See Iceland). The big mistake Congress made was to bail out the big banks. The big banks got in trouble because they took on too much risk. Then they tried to offset that risk through insurance and taking side bets (Derivatives). That spread the risk but it just meant that the insurance companies, like AIG, would also fail. If those bankers with all their degrees from prestigious universities didn’t see the risk, then they are either educated idiots, or those prestigious degrees are vastly overrated. Of course they could just be crooks.

And despite how some try to spin the cause, it was the US Congress that got us in this mess. Primarily through Freddie and Fannie, which as GSE institutions, became the dumping ground for bad mortgages.

The tragedy of course is this lesson is as old as civilization. See the fifth item in the list from The Lessons of History.

They should have passed a single law titled “Not too big to fail stabilization act“. Reduced to one line, it would read, Any bank, investment, or financial institution NOT covered by FDIC, can be seized by The Federal Reserve. Any hard assets would be preserved as well as any loan arrangements. But the highly leveraged risky investment assets would most likely evaporate. No one would buy them. Well maybe for a penny on the dollar just incase they might be worth something in the future.

But, but wouldn’t that destroy a great deal of wealth? Of course. But that is what is happening now spread across the total economy. Why should the people suffer because wealthy people made bad bets? Plus it would not effect the value of the dollar. If anything, it would take dollars out of the economy. Why should those who gave money to Madoff be treated any differently than those who gave their money to those big banks? The were both in effect Ponzi schemes.

As it is now, the big banks will fail again sometime in the future. Want a real world example? Chrysler! The government bailed them out once and actually made money. But the second time? Most likely it will fail this time. Proof that bail outs should be a one time event.

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