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by jholman
5356 days ago
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Excellent link. Regarding splitting retail/investment banking, the following is a completely ignorant question, phrased in the form of a rambling incoherent hypothesis. I don't understand why it was a good idea for the U.S. to bail out the banks, but I can see how retail banking is essential to the month-to-month life of Main St, and so I can see why the government might be willing to spend taxpayer money to save it (to save taxpayers). It seems like maybe if retail banks weren't all playing the investment-bank game, maybe the suicidal investment banks could have been allowed to fail? |
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I think the reason for the bailouts was not combination retail/investment banks. The biggest recipients of bailouts were pure play investment banks. The theory is that failing to bail them out would have led to contagion across wide swaths of the financial system, but the main vector would not have been retail banks; it would have been the counter-parties to the many transactions that the investment banks had, including such examples as pension funds holding CDOs.
I think the root cause of the bailout was the revolving door among the biggest investment bank players (especially Goldman Sachs) and financial regulators, including the Fed, the SEC and the Treasury Department. It's a classic case of regulatory capture <http://en.wikipedia.org/wiki/Regulatory_capture>. I don't think this is so much outright corruption, as the fact that the top finance people in government have gradually come to have the same worldview as the top finance people on Wall Street. So it was easy for them to think that a rash of bank failures was the worst possible thing imaginable, and must be avoided at any cost. At the same time, they could not imagine imposing severe consequences on the management and investors of those banks.
If there's any regulation that is truly critical, it's preventing this revolving door. But I am not sure how we can sanely do that.