I want to endorse several ideas put forward by Scott Sumner. First, that the Federal Reserve should be relieved of its regulation function and those should be given to some other (preferably purely governmental) agency.
Second, that among these actions:
In May 1984 the government bailed out all depositors at Continental Illinois, which at the time was the largest bank failure in US history. At smaller banks, depositors were only protected up to $100,000.
In 1994, Mexico’s creditors were saved by a large US loan to Mexico during the peso crisis.
In 1998, a rescue of LTCM by big banks was organized by the Fed.
In March 2008, Bear Stearns’ creditors were rescued.
the Fed should not have bailed out Continental Illinois, LTCM, or Bear Stearns.
For those of you who disagree with those assessments while believing that income inequality presents a serious problem for the United States, I’d like to ask you a question. If you always bail out large financial concerns, regardless of the legalities, what to do expect? Under those circumstances increasing financialization of the economy and greater income inequality are inevitable. Companies must be allowed to fail. Creditors must be allowed to lose money.
At least with Continental they removed the board and top management. Shareholders lost out (but not bondholders). I would agree to not bailing these out with the caveat that deposit holders not be hurt.
Steve
Lehman Brothers.
I don’t disagree at all with the gist of your post, but it is worth noting that the bailout of LTCM was a private bailout albeit under orders from the Fed.
Income inequality aside, TBTF is a bad practice on its own. The rationale for saving depositors at Continental was that they weren’t Ma and Pa Kettle looking for toasters, but banks with very large deposits, some a significant fraction of their capital. Rightly or wrongly, the concern was systemic, contagion bank failures.
As to how the general creditors escaped is a mystery to me. It seems as unjust as what happened at GM, in an industrial setting. As a side note, the guy who was primarily responsible for purchasing the Penn Square loans? He went to jail.
“He went to jail.”
An important point. In the past, even if they got bailed out, people lost jobs. Sometimes they went to jail. In this past banking crisis, despite what was obvious fraud, few actually went to jail. I have to think this is due to the outsized influence the finance sector now has on both parties. The guys in finance are now much wealthier than they were in the past, so they hold much more influence. While we can debate the influence of measurable money, that tis just the tip of the iceberg. Go through the list of current presidential candidates or Senators and look at the number of people who worked in the finance sector, or have family in the field. The level of inequality is now so high that it is self-reinforcing.
Steve
I think the wealth in finance is only part of the story. Another piece is the culpability of the politicians – can you say Barney a Frank? – who berated regulators as incompetent, elitists and racists. Throw financiers in jail and you also might have to look at yourself in the mirror, and worry about your campaign contributions. And although an unpopular stance, we shouldn’t forget the people with shaky credit circumstances who actually bought homes, so sure they were getting in on the easy money housing game.
The same dynamics are being cheered on in auto finance as we speak, and I’ll wager anyone Hillary Clinton will be no financier jailer.
And then there’s the unsecured credit of student loans.