If the banks declare bankruptcy, all of the toxic assets are wiped clean and the bank is perfectly solvent again. The only down side is that the bank's bonds and stocks would go to 0, and oligarchs like Warren Buffet would lose billions of dollars. The depositors would lose nothing.
The point of QE was to keep the banks solvent without driving their stock prices to zero. It was a gigantic welfare payment to the richest of the rich.
So, uhh, pensions & mutuals (401k's) aren't invested in the financial sector? In MBS?
QE teaches bankers that there are zero consequences for imprudent business practices. This creates a huge moral hazard. Why bother trying to maintain a well capitalized bank if the fed will backstop everything? If something risky makes money, the bank keeps the money. If it falls flat, the fed promises to buy the toxic assets at par. This strongly encourages banks to screw around.
That was quite true during the Bush years. The Greenspan Put was in place, dating from LTCM in 1998. That doesn't mean that the FRB paid par in 2009, at all, nor are they operating under the same cashflow constraints as the rest of the industry. Several large financial institutions did fail, threatening cascading collapse of the industry & the economy. It wasn't really so much about that, anyway, as about the changed structure of the industry & the Bush Admin's extremely lax regulatory interpretation & enforcement. The consequences to the firm don't matter anyway to hired guns incentivized by enormous salaries & bonuses. One year of that & you're set for life. More is just gravy.
Obviously, this wasn't abut particular institutions but rather the whole industry. Like it or not, we need that industry to function in a continuous manner. Just as obviously, the boom bust cycles of deregulated finanicialized capitalism don't provide that. History is full of such examples, 2008 only being the most recent.
So what you're saying is that losing a company representing 20% of car sales would cause car sales to immediately and permanently drop by 20%. No other car company would see increased sales, no other car company would build new factories, no other car company would open more dealerships. Yeah, that makes sense.
That's a strawman argument, because I didn't say that. What I did say was that if GM goes broke, then component suppliers that other makers depend upon go broke too, forcing them to cease production, lay off more workers, which is exactly what we don't need when employment is falling through the floor anyway. When people don't have the money to buy cars, then there's no point to invest in tooling up to make car parts. We were not far away at all from a cascading deflationary spiral in 2008, and we're not completely away from it even now. Witness low inflation in the face of enormous injections of liquidity. Even with that, we're barely staying out of the red zone.
Had the govt & the FRB not found ways to prevent that, we'd be living in the same sort of economic circumstances seen in the aftermath of every great speculative crash in history.
The key, of course, is to place structural constraints on the industry thus preventing exploitable conflicts of interest. There's no way that Libertarian banking can deliver anything other than what it always has, cycles of boom & bust that serve the common people, the broad middle class, not at all.
) would mean that you get less competition and that would likely mean things are less productive. Less productivity means less diversity due to the fact that the market is now far more limited. That means fewer jobs. Increase the market, increase the diversity, increase the options for jobs. I would much rather make 10/hr if I got to work in a comfortable place, vs 11 in a hell hole.
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