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Things looked pretty scary before the bail-out. I don't think it's been long enough for the full economic effects to have been realized, but, if you believe th

Things looked pretty scary before the bail-out. I don't think it's been long enough for the full economic effects to have been realized, but, if you believe the hype, a major crisis was averted. IMO, the bailout was a necessary band-aid solution, although you can't keep on doing it. I think a better solution is stronger regulation of banks. Banks are a major part of our economy, and shouldn't be allowed to make so many risky investments. They can't "print money" if we carefully regulate the types of investments they can enter into. That strategy seems to have worked out for Canada. I know Americans are generally against regulation, but I think that, absent government regulation, banks would need to maximize short-term gain, even at the risk of a crash in the future. People put their money in whichever bank offers the highest return. If Bank A has a bunch of risky investments, which will crash in 10 years but give a good payout until then, they can offer higher interest rates than their more conservative competitors. Competitor B would be forced to adapt, because its depositors will probably be gone within 10 years. Another idea is progressive taxation for banks: Tax the big banks more than smaller banks. That would create an economic incentive for smaller banks, and banks are less likely to get "too big to fail." Not sure if this would work (for example, if many smaller banks invested in sub-prime mortgages, and defaults started occurring around the same time)

anamax 17y ago
> I think a better solution is stronger regulation of banks. Banks are a major part of our economy, and shouldn't be allowed to make so many risky investments. The risky investments were pretty much mandated by the regulators that you think will protect us. Banks must have reserve capital. The regulators encouraged banks to hold lots of Fannie and Freddie stock by treating it specially for the purposes of reserves. As a result, Fannie and Freddie tanking pushed many banks into technical insolvency. (This isn't the last time Fannie and Freddie will make an appearance.) Regulators also granted a monopoly on bond rating to Moody's and a couple of other companies. Oops - they were wrong. Regulators also pushed securitization of mortgages to help boost the housing market. They wanted banks to hold such securities as reserve and wanted that to be seen as safe. Their solution, insurance, as sold by AIG, which was heavily regulated. And, remember Fannie and Freddie? They lied about the loans in their pools, so no one knew how much of the market was subprime. That screwed up everyone's risk analysis. This crash was pretty much a creation of regulation. > banks are less likely to get "too big to fail." If Citicorp is too big, what does that make the US govt? Regulation is systemic risk.

anamax 17y ago

> I think a better solution is stronger regulation of banks. Banks are a major part of our economy, and shouldn't be allowed to make so many risky investments. The risky investments were pretty much mandated by the regulators that you think will protect us. Banks must have reserve capital. The regulators encouraged banks to hold lots of Fannie and Freddie stock by treating it specially for the purposes of reserves. As a result, Fannie and Freddie tanking pushed many banks into technical insolvency. (This isn't the last time Fannie and Freddie will make an appearance.) Regulators also granted a monopoly on bond rating to Moody's and a couple of other companies. Oops - they were wrong. Regulators also pushed securitization of mortgages to help boost the housing market. They wanted banks to hold such securities as reserve and wanted that to be seen as safe. Their solution, insurance, as sold by AIG, which was heavily regulated. And, remember Fannie and Freddie? They lied about the loans in their pools, so no one knew how much of the market was subprime. That screwed up everyone's risk analysis. This crash was pretty much a creation of regulation. > banks are less likely to get "too big to fail." If Citicorp is too big, what does that make the US govt? Regulation is systemic risk.