Too insulated from risk to fail
This article miffed me a bit:
In recent months such big banks as Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) have rolled out newfangled corporate credit lines tied to complicated and volatile derivatives. Others, including Wells Fargo (WFC) and Fifth Third (FITB), are offering payday-loan programs aimed at cash-strapped consumers. Still others are marketing new, potentially risky “structured notes” to small investors.
There’s no indication that the loans and instruments are doomed to fail. If the economy keeps moving toward recovery, as many measures suggest, then the new products might well work out for buyers and sellers alike.
But it’s another scenario that worries regulators, lawmakers, and consumer advocates: that banks once again are making dangerous loans to borrowers who can’t repay them and selling toxic investments to investors who don’t understand the risks—all of which could cause blowups in the banking sector and weigh on the economy.
I’m not so much concerned about the stupid products these banks are peddling. As the article states, these products may work out well in the end. What concerns me is that the article completely misses the obvious question that nobody seems to even ask anymore: is it the role of the US government (paid for by my taxes) to prop up bad businesses?
When giant corporations are backed by the good faith and credit of the United States Federal Treasury—no matter what—then these corporations have no incentive to curb risky behavior.
And today we have the same management teams that got us into this mess, still running strong. Goldman is doing better than ever, in fact.
We have a perfectly good way to deal with bad businesses in the US: let them fail. When an entity files for Chapter 11, the assests are sold off, often in pieces, to new management. This has worked for some extremely large businesses in the past, and perhaps if we could fix some of the mistakes we’ve made in the past and let financial institutions bear their own risks, they’d stop being stupid.
The financial industry borrowed their Dad’s Corvette, drove it off a cliff, then goes back home and asks for a new car. Dad gives them a new car with a “now don’t do that again!”
It’s not working for me.