This probably would have been a better question to ask before we spent $700 billion of taxpayer funds, but… why do we need to preserve America’s banks? Couldn’t we do all of our banking with foreign banks? If Citigroup had been allowed to fail, for example, Hong Kong and Shanghai Bank would still be open for business. What does an American business need that Barclays can’t provide? If the cash is coming from Persian Gulf oil states, couldn’t a startup company here go IPO on the Dubai stock exchange?
One might argue that some of these foreign banks are not in the best shape and are requiring European and Asian governments to bail them out. That’s as may be, but it doesn’t bleed the American taxpayer. We get our cars from Japan, our TVs from China, and our strawberries from Mexico. If most of Wall Street had disappeared, couldn’t we have gotten our financial services from more prudent banks and/or those that had been bailed out by someone else’s tax money?
The Lehman collapse and subsequent chaos seems to show that very large banks, most of which are in the US, can’t be allowed to fail. Smaller banks can, but not Citigroup or Bank of America. The problem is that an institution like Citi has 2 trillion in assets, more than the GDP of most countries in the world. When Lehman failed, suddenly there was no market for commercial paper, and businesses couldn’t fund their operations.
I am all for the free market and using foreign banks, but a move in that direction could cause credit lending to grind to a halt globally.
Murali: I know that everyone says banks can’t be allowed to fail, but I’m trying to understand why. To a layperson it isn’t clear why we can’t import financial services the way that we import a lot of other things.
Maybe being dependent on imports is a bad thing? In the current economic structure, your suppliers of energy and finance have more power over you than your suppliers of, say, strawberries and TVs.
Bank cannot fail because they are the one create money out of debt.
When you deposit $1000. The bank is able to loan out $100,000.
This how the system works. the fact that most people don’t know this
just how banks are in control that basic economic information is
not taught in school.
rd: I’m familiar with the money supply role played by neighborhood banks, but my understanding of TARP is that most of the money has gone to investment banks or A.I.G. and similar firms providing exotic financial services. The banks that engaged in the kind of stuff taught in Macroecon 101 didn’t need a bailout, did they?
I can think of an explanation for a country like India. India a lot of Public Sector (nationalized) banks. These are the only banks that can be dictated to by the Reserve Bank of India (Equivalent to the Fed Reserve) to provide loans to the agri sector, below poverty line people, etc who find it impossible to get loans from the multi national banks like HSBC, Citi, Deutsche, etc here.
Also, a foreign bank could always be forced by its parent country to boycott a certain country (the way an American Bank would be ordered to stop any dealings with N.Korea). This leads to grave problems in baking and hence we need local banks.
If the goal was to keep credit accessible (at reasonable though perhaps slightly higher rates), then the best way to do that would have been for the government to loan the money out directly, possibly using established banks as brokers to do it, for an appropriate fee.
If, on the other hand, the goal was to insulate institutions from the consequences of their executive’s greed, I think the current plan works just great.
Just a note: contrary to its name, HSBC (Hongkong and Shanghai Bank Corp.) is actually British.
Patrick: Thanks for the note about HSBC. Let the Brits bail them out!