jack476 said:
The argument is that it's not right that anyone company should be "Too big to fail", that is, so large that if it goes under it would take the entire global economy with it, as nearly happened in 2008 and ended with the government spending billions of dollars to prevent a global economic meltdown.
Companies go out of business. That's just an unfortunate reality of the world we live in. But when individual companies get so massive and so closely tied to the financial markets as to present a severe global risk should they fail, that means that it's down to everyone else to subsidize the effort to pull them out of the red. When it's their own shortsighted behavior that put them in that position to begin with, you can maybe understand why some people might have felt a bit...irritated, to say the least.
Ultimately, it's risk management. It's inevitable that some companies will fail. Being a very large company is not necessarily a great protection against failure. Ergo having a massive company that could cause tremendous damage if (when) it fails is dangerous. But if you take the one or two massive banks and break them up into a large number of smaller banks, then you mitigate that risk because now a few individuals can fail without causing damage.
Hey, jack476
Thanks for the comments!
I can understand the logic that it would be dangerous to have anyone economic institution become so big and influential that if it were to fail, then it would cause crippling damage to the economy of a nation.
A quick question for you or others who may be in the know is how big actually were these banks that got bailouts during our 2007-2008 U.S. recession? I know the healthcare industry, for example, is approximately 1/6 of the U.S. economy. But I always thought banks were a smaller portion of the economy, no?
Secondly, was there really one,
single bank that was that large as to cripple the entire economy during the 07-08 crisis? Or, was it like likes of banks together? It's hard to imagine a single bank being that powerful.
jack476 said:
Except it's not really about the money in your checking and savings account. That's not in any danger. The problem is that those banks also control such large amounts of debt and stock in other companies. So if they fail, then there's no one to pay off that debt (so a lot of people lose money) and those stocks see their values plummet (so people or companies that keep money in investment funds like retirement accounts see huge losses). The money in your checking account might be safe, but if you've been investing for retirement for the last twenty years and suddenly your retirement fund is worthless, you're pretty much SOL if that happens. Or if you're running a large company that has a lot of assets tied up in investment accounts, and suddenly those assets are worthless, then you're at risk of going out of business (and your employees all lose their jobs, which is where the real mess starts).
In terms of this part, I guess I still don't quite understand 100%. Please forgive me (and thanks very much for your patience) if I'm merely obtuse at this point!
It happens with me sometimes, haha!
So, are we saying? (trying to understand where we agree/disagree):
1.) Consumer deposits (in other words, from individuals - not corporations) are, in fact, covered by FDIC/government, so that anything we put into a bank is safe even if the bank loses its assets through crazy speculation/"gambling" of its money. If I'm not mistaken, the FDIC would cover deposits up to X dollars. So the individual person is safe (up to the FDIC limit).
2.) Banks, after Glass-Steagall was repealed, were allowed to use
consumer deposits to gamble/speculate with? This part I'm still unsure of.
3.) If 2.) is true, then wouldn't 1.) cover that for individuals still?
4.) Banks, after Glass-Steagall was repealed, were allowed to use
corporate deposits to gamble/speculate with?
5.) If 4.) is true, then would FDIC cover those losses as well?
6.) If FDIC covers all consumer and corporate deposit losses, then what is the harm done to depositors?
If I'm hopeless confused, feel free to just let me know. Hahaha. Just trying to nail down how it all works.
