Too Big to Fail or Too Big to Save?

We have been told by the Federal Reserve Bank, the Treasury Department, and both the Bush and Obama administration that the banks and autos are too big to fail, they are too important to our economy to let them fail. We must bail out their risky behavior at any cost to ourselves. These bailouts were made very quickly with hundreds of Billions of dollars, yet no real debate or communication was engaged in with the people who would eventually pay for these bailouts. We little people were just told it was too complex for us to understand and that this was the ONLY way.

I come from a school of thought where there are always more than one way of looking at things. There is always more than one solution. So here is one of those other possibilities: Create a new, healthy bank with the bailout money.

Why is this a possibility?

1) A new healthy bank would be able to create loans under tougher lending standards, but not the draconian terms banks are not offering consumers. This new bank would keep the availability of credit available to sound businesses and individuals, something that was a major problem last Fall, the banks didn't even trust each other. This would have enabled more businesses to stay in business, lessening the job losses. Individuals could have gone to this new bank and refinanced their mortgages with the great lower rates now available. Of course, those who never had any business "buying" their home wouldn't be helped by this, but those who were close and make "smart" decisions could still make it work and keep their homes. This in turn would have lessened the housing market collapse because their would be less houses on the market because more people were able to refinance. This would have helped both the banks and the individuals. It would have enabled the banks to sell the homes at a higher price, helping their balance sheets. It would have helped the individuals who had their house repossessed by the bank because they would owe less money.

Because businesses still have a bank from which they can borrow, they will still be in business and will not have to lay-off their employees. This again creates a virtous cycle in the economy.

2) With the bailouts, the banks reaped all the rewards of their risky behavior while the taxpayers get stuck with the bill. Remember all those record setting profits in 2005 from the financial firms? How big were those bonuses that year? In fact, where is that money now? Oh yeah, it is with the very people who got us into this mess. The very ones who understood what was happening and the risks they were taking.

In setting up a new bank, the banks who took risks too big for their balance sheets would fail. The shareholders who pushed for higher and higher profits and returns would end up with nothing. The employees and executives who enabled this greed to create the risky loans would be in the unemployment lines. The businesses and banks who had healthy balance sheets and did not take unreasonable risks survive. It would be survival of the fittest.

What are those banks who got all of our bailout money doing to show their appreciation? They have raised interest rates on credit cards, they have raised ATM fees, checking account overdraft fees, introduced new fees - like talking to a teller in person, cut credit limits (which hurts your credit score) and added annual fees on credit cards. They are going to get the money to pay back the taxpayer from the taxpayer!