Markets & Economy

Of course they are too big to fail!

It’s absolutely nuts to insist, “no taxpayer bailouts!”
  • A bank -- any bank -- takes in cash and pays money to depositors. Cash isn’t worth anything to depositors otherwise.
  • Nothing is more dangerous than making a loan. Loans create three risks, every time: You might not get paid back, you won’t get paid back soon, and you can’t sell the asset if you need to.
  • No other entity in civilization more clearly demands shared risks than banks. We must regulate them to the eyeballs, make them as safe as possible, but not paralyze them. Today, we’re right on the edge of paralysis.

Word leaked this week that the “living wills” of five of eight giant banks are inadequate. They will be required to do-over, or be fined this fall. Speaking personally, as one of the bereaved citizens at a potential big-bank funeral, it is time to move on from grieving about the Great Recession. Get back in touch with reality and the future. A bank -- any bank -- takes in cash and pays money to depositors. Cash isn’t worth anything to depositors otherwise. It pays nothing if in your mattress, or in a mayonnaise jar under your porch. You have it, which is nice, but it can’t grow. You could invest your cash, but that would be dangerous (see “financial markets"). The great banking fiction The great banking fiction beginning in the U.S. in 1933: If you put your money in a bank it will be safe, government guaranteed and pay interest. Today it doesn’t pay much, but that’s a separate story. Another aspect of your cash: It is liquid. You can spend it whenever you w...