16 hours ago, Maddus Mattus wrote
It's the government (law), by providing a safety nets and the guarantee of bailouts.
Rather than asking the question "were the bailouts justified", which is an interesting question, but probably one for the history books because the bailouts happened regardless of whether you wanted them or not, a much better question is "how can be make sure that we never bailout banks again".
I think the most important observation here is that savings and current accounts are immensely important in the modern world:
1) They provide an electronic payment system reducing the need to physically transport currency e.g. from your employer to you, or from company X to company Y.
2) They provide a convenient way for the government to do data-analysis to look for tax-evasion and money-laundering, helping to tackle crime.
3) They provide a safe place to keep money, centralising the physical security needed to look after currency, and reducing the risk of burglary/mugging etc against ordinary citizens.
4) They provide a mechanism by which your idle money can be reinvested in the wider economy, encouraging growth (e.g. by lending the $1000 in your account as part of a $50000 loan to a small business)
The reason I'm bringing this up, is that it is:
A) In the interests of individuals to hold their money in a bank - even if the bank offers no interest on those savings.
B) Accruing interest - i.e. getting a high ROI on a savings account is a minor consideration for people getting a bank account. This can be seen by how rarely people move banks and the fact that most savings accounts are currently less than inflation. People that care about ROI typically get real investments rather than leave their money in a savings/current account.
C) It is much better for economic growth if people store their money in current and savings accounts than to store it at home as cash.
D) Most people would consider a minor risk of their savings vanishing - even if their savings are relatively small - as a deal breaker with most banks. This can be seen by the large number of people who don't invest anything at all, and by the queues around the block when a run-on-the-bank happens.
Now we come to the fun part - how do we avoid ever paying another bailout - i.e. how do we make banks accountable for their own business mistakes going forward (let's ignore the current bailout for now) so that if they gamble and lose, they go out of business.
Well, we have a few options:
1) We can tell customers that their savings are at risk. This is the pure-capitalist approach, but it will lead to large numbers of people opting out of using savings accounts at all, since a 0.1% interest rate doesn't look very attractive if it's coupled with a 0.5% risk of losing all your savings in a given year.
2) We can make it illegal for banks to put savings at risk - but this negates (4) above.
3) We can force banks to pay insurance on all savings to another private firm - but then we're just transferring the risk to insurance companies, who are typically backed by big banks (so you end up with incestuous insurance).
4) We can force banks to pay insurance on all savings to the government in return for underwriting the savings - but this encourages the bank to obfuscate their risk and run rings round the government. It also makes the rate of insurance more a decision of politics than of risk.
5) We can try and force banks to take less risk overall (i.e. improve capital-asset to risk ratios) - but this reduces the amount of lending that happens in the short term as banks build up their capital ratios rather than lending out to small businesses.
You get to choose one of these five options, but none of them are all that great - but your suggestion of (1) is probably the worst option, since it would immediately lead to a run on the banks, leading to a total collapse of most lending institutions, leading to massive closures of businesses.
The government is currently opting for something between suggestion (4) and suggestion (5) by imposing higher banking taxes and introducing new banking regulations respectively.