Bailouts Are Only For The Biggest Banks!
NS0-154 Up till today, bailouts have been used to tackle crises. However, as many may notice, the money from taxpayers involved are usually offered to the biggest players. For the recent crisis, they were granted to the biggest banks. Let us now analyze the reason and how they benefit the biggest banks.
In 2008, when Bush authorized the US$700 billion bailout, Secretary of Treasury Henry Paulson (previously from Goldman Sachs) immediately gave billions in TARP (Troubled Asset Relief Program) to the biggest banks. Here, money flowed from taxpayers to the organizations that caused the mess. Many of the bailout recipients declined to explain their use of the money and lending fell despite the fact that it should rise.
Regarding this, there are various reasons why bailouts are only for big banks. Among them, I deem one of them to be key for bailouts and that would be deposit insurance. Deposit insurance is basically a policy that insures savings of Americans, helping prevent bank runs where savings are withdrawn on a large scale.
NS0-502 Increases in deposit insurance helps increase confidence, giving savers a sense of security that they won't lose their money. However, this also rewards banks for taking more risks because if savings are insured by the government, banks will be paid when they make mistakes as they know the government will grant them bailouts. As a result, bankers get bailed out for taking risks while taxpayers pay more money to fund these bailouts that don't benefit them. The more risks bankers undertake, the more money they get for bailouts. Thus, if you are a banker, will you want to take more risks?
Here, many may think that all big banks receive bailout money. However, the truth is that only banks with political clout get it. This is because they can influence politicians into giving them what they want. Governed by such a corrupt system, big banks with political clout win and this situation is extremely similar to Russia that has been ravaged by its oligarchs.
1T6-510 To add on, the biggest banks usually take the greatest risks, having the highest chance of damaging the economy. Hence, even if politicians are unwilling to grant them bailouts, they have to do so for the sake of the economy. With the government having no choice but to give in, do you think you can depend on it to save you?
Now, we shall proceed to investigating how bailouts benefit big banks, In the US, if a smaller bank goes bust, the FDIC (Federal Deposit Insurance Corporation) uses payout by closing the bank, paying depositors while the founder and investors lose their money in start-up capital. This will allow big banks to capture more market share using the bailout money as number of banks available now falls.
Also, a sell-off can happen where a big bank uses bailout money to buy a struggling bank to increase its market share, allowing it to charge higher fees and commissions in the future despite creating a financial crisis. Here, the incompetent gets rewarded while the small fry gets squashed with the advent of each new crisis.
Hence, to conclude, with bailouts only for the biggest banks, we get increasingly disadvantaged with every bailout as it forces the poor to pay the rich via taxes. With this, we ought to protect our money from financial predators and leverage our resources to create greater wealth.
In 2008, when Bush authorized the US$700 billion bailout, Secretary of Treasury Henry Paulson (previously from Goldman Sachs) immediately gave billions in TARP (Troubled Asset Relief Program) to the biggest banks. Here, money flowed from taxpayers to the organizations that caused the mess. Many of the bailout recipients declined to explain their use of the money and lending fell despite the fact that it should rise.
Regarding this, there are various reasons why bailouts are only for big banks. Among them, I deem one of them to be key for bailouts and that would be deposit insurance. Deposit insurance is basically a policy that insures savings of Americans, helping prevent bank runs where savings are withdrawn on a large scale.
NS0-502 Increases in deposit insurance helps increase confidence, giving savers a sense of security that they won't lose their money. However, this also rewards banks for taking more risks because if savings are insured by the government, banks will be paid when they make mistakes as they know the government will grant them bailouts. As a result, bankers get bailed out for taking risks while taxpayers pay more money to fund these bailouts that don't benefit them. The more risks bankers undertake, the more money they get for bailouts. Thus, if you are a banker, will you want to take more risks?
Here, many may think that all big banks receive bailout money. However, the truth is that only banks with political clout get it. This is because they can influence politicians into giving them what they want. Governed by such a corrupt system, big banks with political clout win and this situation is extremely similar to Russia that has been ravaged by its oligarchs.
1T6-510 To add on, the biggest banks usually take the greatest risks, having the highest chance of damaging the economy. Hence, even if politicians are unwilling to grant them bailouts, they have to do so for the sake of the economy. With the government having no choice but to give in, do you think you can depend on it to save you?
Now, we shall proceed to investigating how bailouts benefit big banks, In the US, if a smaller bank goes bust, the FDIC (Federal Deposit Insurance Corporation) uses payout by closing the bank, paying depositors while the founder and investors lose their money in start-up capital. This will allow big banks to capture more market share using the bailout money as number of banks available now falls.
Also, a sell-off can happen where a big bank uses bailout money to buy a struggling bank to increase its market share, allowing it to charge higher fees and commissions in the future despite creating a financial crisis. Here, the incompetent gets rewarded while the small fry gets squashed with the advent of each new crisis.
Hence, to conclude, with bailouts only for the biggest banks, we get increasingly disadvantaged with every bailout as it forces the poor to pay the rich via taxes. With this, we ought to protect our money from financial predators and leverage our resources to create greater wealth.
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