March 8, 2009

Top Republicans say banks should be allowed to fail

John McCain and Richard Shelby, two high-profile Republican senators, said Sunday that the government should allow a number of the biggest U.S. banks to fail.

I agree.

Obama made clear in an interview published Sunday in The New York Times that he did not want big banks to fail, saying his administration "would take more significant action to deal with those institutions."

"But the point is that our commitment is to make sure that any actions we take to maintain stability in the system, begin to loosen up credit and lending once again so that businesses and consumers can borrow," he said. "And if they can, then you're going to start seeing businesses invest once again and you're going to see people hired once again, but it's going to take some time."

And since these banks really did not suffer any consequences for their actions (after all, we taxpayers allowed congress to use our money and bail them out) what incentives do they (as well as all other big organizations) have so as not to make such stupid decisions again?

The answer: none.

Why?: Because they will be bailed out again.

If they're allowed to fail, then other organizations will take notice and not make similar stupid decisions.

Read more.

1 comment:

Luis Fernandez said...

Aside from letting banks fail, I can't think of any incentives that would address the root problem. The fundamental principal will remain... these banks serve their shareholders, not the public. The decisions they made maximized profits for the shareholders, and it is to the shareholders they must ultimately answer. Shareholders must keep these corporations in check, and that means that it is the shareholders that need the incentive as much as the corporations themselves if we want to prevent this from happening again. I don't know if this incentive necessarily comes in the form of punishing them financially, but it probably has a financial aspect to it.