why I think too big to fail is nonsense?

T

traderzhangSan

Let's acknowledge that US financial system was on the brink of collapse. Fed Government stepped in with massive bail out programs. The rest is history.

What if Government did nothing? To be sure Goldman Sacks stock would be trade in single digit and all major banks would fail. Is that a bad thing? No!

Government can then step in and buy all those banks very cheap and ask the employees of the banks to stay and do the same thing with same pay. I don't think anyone would refuse that offer.

Then after some time when market recovered, US government would make huge profits. this sound no-brainer.

why the government didn't do that? if it did, we are in much better position financially now.
 
It had more to do with cross default risk. If Bank A has exposure to Bank B, C, D, etc, etc..then even a bank without any exposure has the potential to fail. The seeds for the debacle were set in motion at least a decade earlier, although it's a moving target as many can make compelling cases for a decade prior to that and so on.

The repeal of Glass Steagal under Rubin (who actually quit as Treasury Secretary soon thereafter) was a major influence as well. Once you can threaten bank failures and the insolvency of innocent depositors, it makes it that much easier to negotiate bailouts.
 
If the govt did nothing and let the banks collapse, people would stop receiving their paychecks (the payroll system is based on the commercial paper mkt). People probably wouldn't have been able to buy things, potentially including basic necessities, since modern trade depends on letters of credit provided by banks/insurance co's. There would probably be no cash in the ATM machines, since banks wouldn't be able to trade deposits. Etc...

Regardless of whether it's good or bad, right or wrong, modern society is very very reliant on smoothly functioning financial mkts and, as a consequence, on the TBTF banks.
 
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