back to article So why the hell do we bail banks out?

Much to my joy, I have been asked a question I can actually answer. As opposed to those difficult ones, like does my bum look big in this, do you love me and has your cocaine use ever been more than recreational? That question, coming from Reg reader John Smith 19, and it is, in essence, well, why do we bail out the banks? …

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  1. RLWatkins

    distinction between a bank and an investment bank

    Here in the US "banks" were, up to a time, required to keep their depository institution functions separate from their investment banking functions. The depository stuff is pretty low risk. The investment stuff is pretty high risk. We had to bail these banks out for the reasons you cite because the two got mixed: they were doing investment banking with depositors' funds. If they'd stayed separate we'd have been able to allow the investment banking to fail, as it should have done given the stupid risks they were taking, while the depositors remained in the clear.

    1. Tom 13

      Re: distinction between a bank and an investment bank

      No, the banks in the US failed because they made to many bad home loans. That's why the focus on Freddie, Fannie, and what's their name who no longer exist out west and whose "assetts" are now polluting all the remaining banks.

      1. Anonymous Coward
        Anonymous Coward

        Re: distinction between a bank and an investment bank

        " the banks in the US failed because they made to many bad home loans. "

        So the world of non-transparent complex financial derivatives and the people profiting from creating and selling them wasn't involved at all?

        Dream on.

        Too many bad home loans was indeed A Bad Idea but would have been ultimately recoverable.

        Packaging these bad loans up into tradable financial products in strange ways and pretending that doing so made the well understood risks go away, despite all the arithmetical and logical evidence suggesting otherwise, and then selling these non-transparent products so widely across the banking sector that every bank thought every other bank was at risk? That's what made it end so badly.

      2. Anonymous Coward
        Anonymous Coward

        Re: distinction between a bank and an investment bank

        " the banks in the US failed because they made to many bad home loans."

        No. the banks fraudulently sold junk bonds, and gave out loans knowing they couldn't be repaid.

  2. Anonymous Coward
    Anonymous Coward

    Houses are consumer goods.

    Remember? They really are. They are not savings vehicles nor are they investments for anyone but landlords. They are not even investments for farmers. For a farmer, a house is just another item he is obliged to carry on the expense side of his ledger. You might well enjoy living in a house of your own, but please do not be deluded into thinking that the money you have borrowed against it is a guaranteed investment that you can live in for a while.

    Back when I was in high school, we were taught tp put at least half our savings into a house. So, we did. Then we all began retiring at about the same time and look what happened to the price of real estate and the banks that had loaned money out for the purchase of houses. What we did during the sixties and the seventies all but guaranteed the tragedy of 2008.

    Bailing out the banks is not a solution. It is the underlying problem that needs to be fixed and so far, on one knows how to do that. Look at what is happening to Greece. The United States is in no better shape than Greece is. The only difference is that Greece is tiny and we are huge. The Greeks are now going broke because they borrowed a trillion dollars to build a bridge across the Gulf of Corinth. We are going broke because we tried to bear the defence load for the whole of the West while paying out for exorbitantly expensive social welfare programs. The United States is now in debt to the tune of $114 trillion; and our debt is growing at a very rapid pace. Our Congress refuses to make real spending cuts. They insist on keeping the United States government as large and as intrusive as it is now. I cannot hold out any hope for anyone that matters will change. You are all well advised to standby for an unexampled crash.

    1. fajensen

      Re: Houses are consumer goods.

      The United States is now in debt to the tune of $114 trillion;

      You are assuming that this has to be paid back?

      The world does not really work that way - sovereign defaults were quite normal up till 1980's or so when it suddenly became "bad form" to soak the creditors.

      Eventually the US is going to go for the straight default or some way of printing itself out of the whole, soaking the holders of US securities. When you know that you will run away from the bill, then it is perfectly rational to run the bill as high as possible - all those USD are buying real things; and the flood of money is even pushing up prices so the Chinese and other competitors have to work harder to get the USD they need to pay for their stuff.

      The US is not going broke because of the debt, one cannot go broke when one does not have to pay what one owes; the problem in the US is that the economy cannot grow fast enough to support the looting and fraud perpetrated by the CEO's - similar to what happened to the USSR; The ruling elite sets itself up to loots the hell out of the country, after a while the looting is perfected and all value is instantly vacuumed up and squirrelled away in secret accounts, the economy dies. Partly because there is no surplus capital to invest with, partly because everyone stops participating in the sucker game and use vodka, favours or cash for exchanges.

      1. Charles 9

        Re: Houses are consumer goods.

        "Eventually the US is going to go for the straight default or some way of printing itself out of the whole, soaking the holders of US securities."

        The government is forbidden from doing that, as the Fourteenth Amendment specifically states. "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

  3. S4qFBxkFFg

    @Tim

    As an alternative to bail-outs, how about making it illegal for a limited liability company to hold a banking licence?

    It would certainly increase the scrutiny of management by shareholders, although I'd consider the main benefit to be the comedy value of bank share prices occasionally going negative. (Are the exchanges even set up to do that?)

    edit:

    Also, "ATM machines". Don't do that.

    1. Tim Worstal

      Re: @Tim

      Well, without limited liability there'd be no shareholders. Everyone would be a partner (there is actually one bank still without limited liability. But it's necessarily small sa it can't get capital from hundreds of thousands of people). Investment banks, up to the 1980s, were in fact such partnerships. Goldman still was until, umm, late 90s, mid 00s?

      Without said limited bit having a stake in a bank would be like being a Lloyds name in the 70s and 80s. And people have learnt that lesson, unlimited liability when it's not actually you running the risks.....

  4. jdoe.700101

    Automatic nationalisation for TBTF

    Why don't governments declare that any bank deemed to big to fail will be automatically nationalised without compensation to the shareholders? That would seem to concentrate senior management and wake up the institutional shareholders. After all who really cares about unvested bonuses, when you already own a couple of houses, cars, and have cashed in multiple previous bonuses.

    1. Anonymous Coward
      Anonymous Coward

      Re: Automatic nationalisation for TBTF

      Except such a law would NEVER pass the legislatures. Banks are a powerful lobby, recall. Plus there will be cries of SOCIALISM and ROBBING FUTURES since, recall, many large shareholders are in fact market funds and the like who are pooling the resources of many individual investors. There's just too much risk of knock-on effects. Besides, the people in charge of the banks are likely to be able to pull off tricks to liquidate their assets before any kind of nationalization occurred. Being the insiders, they can move faster than the government can.

  5. Anonymous Coward
    Anonymous Coward

    Has that assumption been tested?

    Thank you for your article. I take it to be a description of the thought process and "received knowledge" of mainstream economists rather than axiomatic truths.

    However, there is something that still bothers me, and is the "too big to fail" argument.

    I remember very well when in the weeks before the American's latest (at t he time) "what could possibly go wrong if we invade this country" moment back in 2003, everyone was so worried about the expected oil supply disruption, and back then the "conventional wisdom" was that oil prices above $50 would basically spell the end of the world. A couple years later it shot up to over $100 and we're still hear, bitching about how $60-ish a barrel is too low.

    So next time we argue that X is too big to (be allowed to) fail, why don't we just put the theory to the test? Be nice, and probably beneficial in the long term, if as a society we could become a little bit less risk averse than we've turned to in the last half century. While not a big fan of him, I think I'd rather have a Churchill than a Chamberlain (I'd probably still have a Chamberlain over a Cameron, mind).

  6. Anonymous Coward
    Anonymous Coward

    so, what to do if you think a crash is around the corner?

    Sell the house?

    Buy gold? Or soap or whatever?

    1. Tom 13

      Re: so, what to do if you think a crash is around the corner?

      Productive land is always a solid investment. Especially if its also got a decent water source. Also, invest in precious metals (gold, silver, lead) and non-hybrid seeds. Sheep and chickens would probably also be in order. Not so sure on cows unless you've got a big family. Maybe a couple of goats and a few pigs.

      Well, that's a start at least.

      1. Anonymous Coward
        Anonymous Coward

        Re: so, what to do if you think a crash is around the corner?

        Especially if its also got a decent water source

        "They" have fracking to take care of that!

  7. Anonymous Coward
    Anonymous Coward

    Money creation in the modern economy

    "which is about picking up the stuff being saved by some portion of the population and moving it over to where it can be invested in what some other sector would like to consume"

    This is kind of a primary schools pupil's understanding of a Bank. And while the author of this article identified and analysed the flaws and necessities that need to be solved in our current economic system very well, he shows a complete lack of knowledge in even the most basic banking frameworks today. Hence, the conclusions are completely meaningless.

    This can not be corrected in a post, but if somebody wants to inform oneself rather than just picking up buzz words for a pub argument, I recommend the following search terms: "Money creation in the modern economy", "Money supply (M0, M1, ...)","Credit money" (also debt theories of money).

    Here an interesting factoid from the text books that should help to keep thinking in the right direction: If a person would to repay it's loan in one go, that money is then not in the banks vaults, but effectively no where (removed from the economy as the text book calls it, destroyed as a normal person would say).

    1. Anonymous Coward
      Anonymous Coward

      Re: Money creation in the modern economy

      "Here an interesting factoid from the text books that should help to keep thinking in the right direction: If a person would to repay it's loan in one go, that money is then not in the banks vaults, but effectively no where (removed from the economy as the text book calls it, destroyed as a normal person would say)."

      Not necessarily. The removed encumbrance means the bank is more liquid. That's why they don't mind too much if you pay off your loan. It means they have the freedom to dole out a new loan to take its place.

      1. Anonymous Coward
        Anonymous Coward

        Re: Money creation in the modern economy

        Not necessarily. The removed encumbrance means the bank is more liquid.

        Maybe.

        Or Maybe the dumb-as-a-sack-of-broken-hammers-bastards made bonds out of my debt and sold them to someone, probably another branch of themselves, to fix an artificially high asset price that they could then leverage 150:1 by placing it as collateral for a loan to themselves?

        That would explain why my former bank was so pissed that I suddenly paid off a 20 kEUR loan, they where gouging me at 16% p/a for, that they closed all my accounts, cancelled my cards, login ... and didn't bother to send me an analogue letter in the mail either. I had to call customer service!!

        1. Anonymous Coward
          Anonymous Coward

          Re: Money creation in the modern economy

          "That would explain why my former bank was so pissed that I suddenly paid off a 20 kEUR loan, they where gouging me at 16% p/a for, that they closed all my accounts, cancelled my cards, login ... and didn't bother to send me an analogue letter in the mail either. I had to call customer service!!"

          And what happened to the money IN those accounts? They usually can't just close an account without your permission since it's YOUR money in there (otherwise, you could file a legal action to reclaim the money).

          1. Anonymous Coward
            Anonymous Coward

            Re: Money creation in the modern economy

            They sent a check for the account balance. *Just* the check. I was like "Eh? - wtf is that?!, "huh? - cant login???". At least I managed to fix the bills before the direct debits started to bounce and generate penalties. Now, I don't use direct debit. I pay "manually". Less risk.

    2. Anonymous Coward
      Anonymous Coward

      Re: Money creation in the modern economy

      "if somebody wants to inform oneself rather than just picking up buzz words for a pub argument, I recommend the following search terms: "Money creation in the modern economy", "Money supply (M0, M1, ...)","Credit money" (also debt theories of money)."

      Or find out the origin of the following quote, which is probably four decades old, and read around it a bit:

      “The process by which banks create money is so simple the mind is repelled.”

  8. Bogle

    No running in the hall

    Probably a dumb question based on a mis-reading of the article but couldn't we (her Maj's government) have allowed RBS to go bankrupt and *then* stepped in to buy them out at a much more reasonable, and realistic, price? If the point of the bailout is to stop a run on the bank couldn't we have still prevented the run by being quick with the bankruptcy / buy-out announcements?

    1. amanfromMars 1 Silver badge

      Oh dear, what a shame .... not!

      Probably a dumb question based on a mis-reading of the article but couldn't we (her Maj's government) have allowed RBS to go bankrupt and *then* stepped in to buy them out at a much more reasonable, and realistic, price? If the point of the bailout is to stop a run on the bank couldn't we have still prevented the run by being quick with the bankruptcy / buy-out announcements? .... Bogle

      Hmmm, yes, quite so, Bogle ...... but that would only be to the majority advantage if governments and banking weren't into the forming of a conspiracy against equitable systems of man management and the creation of private profit from public toil.

      You have to get over the notion that governments are primarily there for the people whenever they are there to better self server themselves at the expense of the people, although that does rely on the system being kept in pig ignorance of the shenanigans floated by dodgy administrations, and that luxury is fast disappearing and proving systemically problematic to attack or defend oneself against.

  9. J.G.Harston Silver badge

    I don't have your money, it's in Bob's house, and Bill's house!

    (Grabs pitchfork)

    EVERYBODY TO BOB'S HOUSE!!!!

  10. Justthefacts Silver badge
    WTF?

    P2P lending

    Zopa & Ratesetter perform maturity conversion, by allowing the loans to be tradeable between lenders. Given that P2P lending performs exactly the same function as TBTF banks, surely governments should also underwrite / bail-out P2P lenders? Why does the bailout argument only apply when Classic Big Banks stand to lose money, and not when P2P lenders stand to lose?

    Alternatively, for such a strategic national interest that taxpayer must subsidise it by 300bn every couple of business-cycles, why couldn't UKGov just run a nationally-owned online P2P lender?

    P2P achieves much lower market friction than classic banks, so this should actually make free-marketeers very happy 5% saver rates, 5.5% individual borrower, 7.5% business borrower, what's not to like. Surely not that "free-marketeers" are actually special pleading on behalf of large banks with an entitlement culture, and explicitly against efficient capital deployment to businesses that are free to make a profit or fail.

    1. fajensen

      Re: P2P lending

      "Market Friction" is what pays for the free whores & blow offered at those exclusive resorts where the decision makers are invited to seminars on "How deregulation and Zero enforcement is Good for YOU^H^H Society"!

  11. Jim 59

    Because London would never allow its local industry to go into decline.

  12. Anonymous Coward
    Anonymous Coward

    Another week, another set of billion-dollar fines. Banking as usual.

    So here we are again, this week various countries are fining (criminal fines not civil penalties) various global financial institutions billions of dollars/pounds each (ie a couple of days turnover). This time it's for a foreign exchange cartel, if I've understood right.

    And as usual, managers are only responsible when things go right and they deserve a megabonus, not when things go wrong and they deserve (you choose).

    No wonder the big banks see little reason to trade honestly and fairly, when any penalty they do occasionally pick up can and will be passed straight through to their paying customers.

    Banks behave badly, banks eventually get found out (not by regulators or auditors but by internal whistleblower in this case), banks get criminal convictions, banks have their wrist gently slapped, banks (and bank management) continue to do business largely the same way as before

    Market forces don't seem to be working out quite right here. Not for the non-banksters anyway (and that includes any banks that are for some reason trying to play an honest game and hoping for a level playing field).

    http://www.bbc.co.uk/news/business-32817114

    http://www.wsj.com/articles/global-banks-to-pay-5-6-billion-in-penalties-in-fx-libor-probe-1432130400

    Highlight: The possibility of five large banks pleading guilty to criminal charges in a single day—including the largest and third-largest U.S. banks by assets, J.P. Morgan and Citigroup—would have been unthinkable only a few years ago, when executives warned the fallout from such a move would be disastrous to their ability to conduct business. But other large overseas banks have pleaded guilty to criminal charges in the past year, with minimal effects to their operations. The five banks said they expected little disruption to business.

    1. Anonymous Coward
      Anonymous Coward

      Re: Another week, another set of billion-dollar fines. Banking as usual.

      "Highlight: The possibility of five large banks pleading guilty to criminal charges in a single day—including the largest and third-largest U.S. banks by assets, J.P. Morgan and Citigroup—would have been unthinkable only a few years ago, when executives warned the fallout from such a move would be disastrous to their ability to conduct business. But other large overseas banks have pleaded guilty to criminal charges in the past year, with minimal effects to their operations. The five banks said they expected little disruption to business."

      They were ready for this one, and really $5.6B between the five of them isn't exactly a crushing blow. Plus, like others have said, as a last resort, they'll pressure Washington to comply or they can threaten to pack up. They're more than Too Big to Fail, they're Too Big to Ignore because what happens to Washington's precious tax revenues if some of these big banks with their assets and so on suddenly pull up stakes? It's the same problem with oil companies; how do you deal with a company whose threat to move out and deny you their taxes has a noticeable effect on the balance books?

      1. Anonymous Coward
        Anonymous Coward

        Re: Another week, another set of billion-dollar fines. Banking as usual.

        "how do you deal with a company whose threat to move out and deny you their taxes has a noticeable effect on the balance books?"

        That's real easy.

        Companies are run by people. People like to think they are personally and individually responsible for the success of their company, therefore by the same token they are personally and individually responsible for the failures (and criminal wrongdoings) of their company.

        Their personal and individual megabonuses for 'success' logically mean there must also be significant personal and individual downsides when things go wrong, but somehow that hasn't happened yet.

        If they don't like carrying personal financial risk as well as having a guaranteed megareward even if they fail bigtime, they can be on a flat wage, maybe even a zero hours contract, like they want for the rest of us.

        It's only fair isn't it?

        Watch them clean up their act if that was to happen.

        1. Anonymous Coward
          Anonymous Coward

          Re: Another week, another set of billion-dollar fines. Banking as usual.

          "It's only fair isn't it?

          Watch them clean up their act if that was to happen."

          But the thing is, they have the leverage to cheat the system. Essentially, being a huge multinational corporation and such, they can play countries against each other: try to make them play ball and they'll tempt another country to balk, take their ball, and go there instead.

          Essentially, huge multinationals are global players unto themselves, with only the lack of a standing army keeping them from being basically sovereign powers like they essentially are in Gibson's Sprawl trilogy. They're not too worried about the law because they can influence the law if they have to.

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