This seems to be a never ending debate – do we let banks fail or not? Some people claim that the failure of these massive institutions would be too catastrophic for the private sector to be able to handle. I say rubbish. Capitalism without losers is like Catholocism without hell (as Kyle Bass once said). That’s been my position since day one. Rather than regurgitate what I’ve been saying in the comments section and in previous posts about financializaton, etc, I’ll post a few comments from two people who I think have really nailed this one.
From “recapitalize the private sector” Via Winterspeak:
“First, if banks were making loans that did not get paid back, then they were not doing their primary job which is to make good credit decisions. Bad credit decisions should be punished, and the owners and operators of such companies should be fired and/or wiped out. This is how markets work. Rewarding such behavior only encourages more bad practices in the future, and people (rightly) start to wonder why we have a financial system at all.
Second, if banks fail, that contraction in private financial asset growth can be balanced by “capitalizing” the rest of the non-Governmental sector directly (through some combination of tax cuts and spending increases — whatever increases the deficit). Since economists at Harvard and Princeton do not understand that the Government is the sole creator of net financial assets (equity) for the private sector, they do not know that this policy lever is on the table. So we are where we are.”
From Ashwin Parameswaran, A Simple Policy Program for Macroeconomic Resilience:
My policy proposal has three legs all of which need to be implemented simultaneously:
- Allow Failure: Allow insolvent banks and financialised corporations to fail.
- The Helicopter Drop: Institute a system of direct transfers to individuals (a helicopter drop) to mitigate the deflationary fallout from bank failure.
- Entry of New Banks: Allow fast-track approvals of new banks to restore banking capacity in the economy.
Ashwin at MR also has a new post on why we should allow failing banks to fail. I highly recommend it.
Allowing the banks to fail, forcing the losses on these investors and recapitalizing the consumer would have killed two birds with one stone. We would have substantially shrunk our bloated banking system as well as recapitalize the households. Instead, we have bloated banks again and a private sector that is saddled with debt. Welcome to the balance sheet recession and the continuing financialization of the global economy…..Enjoy your stay. It will not be pleasant.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.