Reply to SVB failure

Forum Index » Money and Finances

Reply to "SVB failure "

Subject:

Emoticons





More smilies

Text Color: Font: Close Marks

[quote=Anonymous][quote=Anonymous]Like this comparison to the S&L crisis from the 80s, Paul Krugman:

[b]In banking, insuring deposits means that depositors have no reason to concern themselves with how the banks are using their money. This in turn creates an incentive for banks to engage in bad behavior, such as making highly risky but high-yielding loans. If the loans pay off, the bank makes a lot of money; if they don’t, the owners just walk away. Heads, they win; tails, the taxpayers lose.[/b]

This isn’t a hypothetical case; it’s pretty much what happened during the S.&L. crisis of the 1980s, when savings and loan associations, especially but not only in Texas, effectively gambled on a huge scale with other people’s money. When the bets went bad, taxpayers had to compensate depositors, with the total cost amounting to as much as $124 billion — which, as an equivalent share of gross domestic product, would be something like $500 billion today.

The thing is, it’s not news that guaranteeing depositors creates moral hazard. That moral hazard is one of the reasons banks are regulated….[/quote]

The alternative is everyone flocking to a bank that they know is too big for the government to ever let fail. It's really hard for the average account holder to dive into a bank's financials, it's much easier to go to a too big to fail institution. If I'm worried about the FDIC maybe declining to step in, I avoid local and regional banks because they can be allowed to fail. Wells Fargo or Bank of America cannot be allowed to fail, so no matter how stupid or reckless management is, my deposit is probably safe [/quote]

Options

	Disable HTML in this message
	Disable BB Code in this message
	Disable smilies in this message

Review message

Search Recent Topics Hottest Topics