This is a much more complicated issue than "derivatives bad, banks involved with derivatives bad". Yet I would still argue several basics that do need to occur. We should _not_ have institutions which are "too big to fail". Derivatives should be regulated. Regulations of banks should be made much more effective. Banks should be pushed into the old standard for banks - deposits and loans.

The big problem is the same as it has always been. You need someone who knows the financial and banking business to be able to effectively regulate and oversee banks and the financial system. Such people inevitably are in the banking or financial worlds. So they will always have that perspective influence their views and actions.

The instinctive reaction from people, as is mine (as seen above) is to try to simplify. Unfortunetly, the reality of the world is that is has become way too complex for that to reoccur. Yet, in the case of banks, I would still argue vehemently for simplification.

"Some banks were "too big to fail" not just because they were big, but b/c their creditors had lent them so much money that the creditors would go under if the big bank failed." - Phoenix

I think that is what the "too big to fail" concept is all about. The idea, an economic one not a political one, is that an economy needs a foundation which is reliable. Banks are that foundation. Anything which threatens that foundation has to be responded to. And I think that, because banks are so important, they should be treated as a special case - and forced to remain in the core "banking" business. And thus not allowed to become "too big to fail".

BTW, I do not believe that companies like GM, IBM, Microsoft, etc. are in the "too big to fail" category - even though their collapse would have tremendous ramifications. And I don't think the government should be in the business of bailing them out. The big gripe I have with the exisitng bailout program. Which otherwise is doing its job.

"If you believe this, you clearly haven't been paying attention for the past year."

If you don't believe this, you only display that you don't have sufficient knowledge about economics.

""Too big" makes it sound like limiting the size of banks is the answer."

Yeah, that the obvious answer. But really difficult to realistically determine and enforce. Which is why the other idea you proposed, "limiting counterparties' exposure to any one borrower" _is_ a better target. Still, when you deal with the huge corporations, you cause problems. Another, _seemingly_ obvious, solution is to distinguish between bank lending, i.e., to people, to small (or medium) businesses, to large (and international) corporations. Again, delineation is an issue. Still, the bottom line is that it is a complex situation and will therefore require, at one point or another, a complex solution.

"Curious -- why draw a distinction between banks and other companies?"

Because of the economic definition of "too big to fail". Which is pointed towards what will cause the economic system/foundation to fall apart. While the collapse of corporations can have severe economic reprecussions, they don't threaten the system per se, merely the country's economy. A fine distinction, to be sure, but a real one.

"Well, "merely" seems misplaced if you spend any time in the rust belt."

It's the difference between the country's economy failing and segments of it having problems. The difference between 30-50% (or higher - read about Germany in the 1920's) unemployment and 15-20%.

"And I'm thinking "the system" needs to be threatened."

Which is another way of stating that you are willing to accept huge unemplyment for a _possible_ outcome. I don't agree.

"...nothing has been done to keep them from going back to business as usual."

That is a problem that needs to be faced. The first, and critical problem was seeing the economy collapse. Which is unacceptable. And why the banking system needed to be saved. Now comes the next step. With the added issue of what to do about "too big to fail" banks.

"This is the system you want to preserve?"

What - a system with banks as its foundation? Yep, desperately want to preserve that. If you don't, I'm sure you'll be willing to go to the 30-50% who will be unemployed and explain how things are working out better for them. Especially during the 10-20 years they will be unemployed, while the system "fixes" (will it?) itself.

"Huge unemployment is the current consequence of maintaining the system we've got."

You gotta prove a statement like that. Cause the unemployment rate isn't 30+%. And because most economists don't agree.

"The banking system didn't need $700B to be saved."

Didn't say it did. You may notice I didn't agree with the bailouts of non-banking companies which is where most of what money has been spent - and it hasn't been $700 billion, last I heard.

Address my statements or I see no reason to continue.

#40 | Posted by IraqiBukkake

What crap. Do you even have a clue what an economic collapse entails? Read about some before you spout crap. That's what I find most irritating about those who have no problem with an economic collapse. They demonstrate absolutely no clue about what happens in one.

Banks don't start lending immediately if they've gone under. Unemployment doesn't stop as soon as banks start lending. Companies don't start hiring immediately after they can borrow again. Everything takes lots of time. And each situation lenthens that time. In Germany of the 1920s and 1930s that took 15-20 years.

"Adjusted, the unemployment rate is around 16 percent ..."

Not what I was referring to. Which was his statement "Huge unemployment is the current consequence of maintaining the system we've got."
And comparing what the unemployment rate is now to what it would be in a banking system collapse.

"This line is easily my second favorite crock of shit from this economic crisis behind "It would have been worse"."

Yeah, because what do professionals know - HIE experts obviously know better. The most obvious indicator of American decline is this belief that all opinions are equal. And that someone who dabbles obviously knows more than someone who has devoted their career to a topic.