Why banks are saved by the government ? Where is the free market?

Hi guys.

How is possible that us, the population, to survive, needs to fight with the rules of the free market and of the invisible hand, while when a bank is failing, the government save it by giving money to it?

It's something that happened in the USA and is also happening in Italy today.

Thanks for the help.

WiSi.

Reply 1

gjd800

So that people don't lose their life savings etc.?

Reply 2

WiSi

Original post by gjd800

So that people don't lose their life savings etc.?

This is a sort of justification for doing it.
Why the State do not save companies ?
In this way make people to do not lose their job.

Well, in my country people do not put in the bank the money for the retirement, and bank in most of the cases do not have the right to invest the saving of others, because are in the deposit, so if a bank fail they should give immediately the money back.

In my town a person suicided because the bank lost 100.000 euros that he saved.

Reply 3

04MR17

Volunteer Section Leader

Because the people in government often have lots of friends in the banks and the conversation goes something like this:

**phone rings**

"Roger old chap, we're in a spot of bother over here at the city, got some financial issues, you couldn't help us out with the treasury could you?"

"Sorry to hear that Cuthbert old sport, I'll see what I can do for you, anything to help an old fellow out"

Reply 4

gjd800

Original post by WiSi

Sometimes (rarely) the state will intervene if a company collapses. The difference is that it is in principle easier to go get another job, all things being equal, than it is to recoup what might be 45 years worth of savings should your bank go under.

The govt will have other reasons to get involved, I'm not au fait with banking law and the intricacies of lending, but that's part of it at least.

Reply 5

3121

No banks, no business, no homes, no life savings, no current account savings, no credit card, no pensions, you do the maths!!

I agree the government’s role isn’t to bail out the banks, it’s their job to ensure banks operate responsibly to protect savings, businesses, pensions, etc. in the first place. But as a result of government failure it’s the only responsible thing to do, many free marketers in the USA were prepared to let the banks collapse and let the market do its thing

Reply 6

username3672344

Original post by WiSi

If the government didn't bail out the banks, there would have been a run on the banks which would have brought the world's economy crashing down.

Millions upon millions of people would have lost absolutely everything. Business after business would have fallen like dominoes.

Reply 7

WiSi

Original post by Zxyn

Yes, but why a bank can be saved if fails and do not respect the rules of the free market?
If 90% of the people have to fight with the free market to bring the bread at home, why the people that defend the "free market" do not attack the interferences of the government ?

They always justify the free market as a natural law, that we must accept, why in this case they accept this?
It is not honest, neither coherent.

Reply 8

Rakas21

Original post by WiSi

The simple answer is that reducing the money supply would on the whole be horrific for most people. Banks have been permitted to engage and speculate on hundreds of billions worth of contracts (you put your money in the bank, they lend against it ten times over and the cycle goes on) and hence allowing a bank to just go under means that all those contracts are in default. Contagion then spreads to any bank that borrowed from them.

With all that being said, an out and out bailout was the wrong thing to do since it has allowed a failed business to survive (it is unlikely that RBS will ever recoup the ~£50bn of losses racked up) and instead my belief is that the state should have nationalised the likes of Northern Rock and RBS at a penny per share (tough crap for the investors) and then manage a write down and asset sale while giving people time to get their cash out. It would still cost the taxpayer money but be no worse than the collapse of a large firm.

(edited 6 years ago)

Reply 9

cloudc

In the 2008 financial crisis, the UK government bailed out the big banks which had got in to trouble. The economy was already int eh midsts of a recession so to then wreck consumers confidence even more was not an option. Therefore taxpayers money is used to bail out the big banks. Is it fair on society? No. Is it for ours and the economies own good? Yes. Will something like this happen again? Probably not (although I can only speak about my knowledge of the UK). This is because since the 2008 there has been much tighter regulations in the financial sector for example:
> Banks having to keep larger reserves if they take bigger risks in order to have enough to cover bad debts
>More rigorous checks for consumers wanting credit seen with the increased difficulty of managing to get a loan, however this has seen the rise of pay day loans with high interest repayments creating debt for many consumers in the UK
>The reduction of systemic risk through policy. In the 2008 financial crisis after one bank went down the rest of the banks on the high street did the same, because they all have shares in each other. Therefore policies were put in place so that banks had a limit on what they could invest in one another.
> Regulations were also put in place to say that every bank has a responsibility when giving out credit. Banks can't simply hand out money to whoever they like they must be sure that the consumer has the ability to pay back the credit with the relative interest repayments as well.

Reply 10

username3672344

Original post by Rakas21

In your opinion what would actually have happened if there were no bailouts post crash? Would there have been a run on the banks? How bad would it have got?

Reply 11

mojojojo101

Firstly, the is no 'invisible hand of the market', that idea is total *******s.

Secondly, despite the rhetoric that comes out of the mouths of politicians there is precisely nowhere in the developed world that operates under what could sensibly be called a free market. I'd go so far as to say that by its very nature the State is incompatible with the very idea of a Free Market.

Reply 12

gr8wizard10

so we continue to get paid our bonuses,

thx for your interest in the subject.

Reply 13

Rakas21

Original post by DeBruyne18

In your opinion what would actually have happened if there were no bailouts post crash? Would there have been a run on the banks? How bad would it have got?

The initial impact would have been extraordinary given the capital that HBOS held and the concentration of the UK banking market. We would be a double digit GDP loss initially followed by a deflationary spiral. UK administration law would have prevented the worst excesses and perhaps held off contagion but even the initial thump from a reduction in the money supply would be something we have never witnessed.