Should We Let Big Banks Fail?
The last 18 months have been a roller coaster ride for big banks. Names like Lehman Brothers, Bear Stearns, and Washington Mutual, icons in the banking world for decades, no longer exist. Other large banks that have survived have only done so with massive infusions of cash from the Federal government. This has been a controversial plan from the start, but there is a growing group that believes we would be better off letting banks fail.
Three of the more well known skeptics who are against the bailouts spoke to lawmakers this week and outlined their reasons for letting banks fail instead of continuing to rescue them. Their stance is that by bailing out banks that are in financial distress, the government is actually making it harder for the economy to recover. There are a few key reasons for their position and changes that they would like to see going forward.
The first element that needs to recover is confidence in the financial system. People need to be able to trust that banks can operate on their own. Right now it’s impossible to know which banks if any would be solvent without government intervention. Banks also need to be treated equally-why does the government consider AIG too big to fail, while at the same time allowing Washington Mutual to go under? People need to understand why the banks that are being propped up are being kept afloat.
Next, taxpayers need to have faith in the way the government allocates their tax dollars. If taxpayer dollars are going to be loaned to banks, there needs to be a plan for how those funds will be monitored. In the first round of TARP money, there was no accountability, and no one knows exactly what banks did with those funds. Accountability for the way tax dollars are spent is necessary to maintain or restore faith in the elected and appointed leaders making these decisions.
Finally, people need to have a vision of where this is going to end. Obviously the goal is to rebuild a broken system. What we’re missing is a roadmap, a clearly defined plan that will get us to a desired destination. Right now there is a feeling that we’re pouring money into a bottomless pit and there is no end in sight. A vision would make a big difference in restoring confidence.
This is sure to become a bigger issue when the results of the stress testing are released and we get a better idea of just how healthy or unhealthy major national banks are. It will be interesting to see whether lawmakers address the concerns that they listened to this week or continue to loan money to these institutions with a strategy that is basically one of hope for a positive result.
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