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Why Not Just Let the Big Banks Fail?

When taxpayers’ money is at stake, shouldn’t the ailing market left to wither on its own?

So everybody’s asking nowadays how come the government is acting like a nursing mom to the country’s big banks. People are wondering why nobody’s taking a stand against bailing out financial institutions that have amassed billions of taxpayers’ money. Are these banks still worthy of financial support after the first batch of recipients failed to increase their lending and instead use the funds to acquire small banks? What are the repercussions of leaving the free market cutting off their lifeline and ultimately saving trillions of dollars?

We can’t afford to lose them. It’s that simple.

First, the big banks currently hold a large percentage of toxic assets. Acquisitions by BofA, Citigroup and other banks have not reduced the total sour loans in the industry. So letting them close their offices would certainly cause billions, if not trillions, of damages in the financial markets. Commercial lending will have to stop and that would mean more companies downsizing their workforce. When this happens, we’d have to brace ourselves for more disappointing economic figures – worse than the 6.1 percent contraction in the first quarter of this year.

Second, aside from loss of banking jobs, we’d have a series of bank runs when doors get locked. We doubt that the small players can also carry out the large scale operations of these big banks since they can’t afford to have lower economies of scale in the first place.

Third, the banks’ top executives also have connections with the people in the Congress, the Treasury and the White House. Remember when Tim Geithner had lunch together with Citigroup and Goldman Sachs’ big bosses? Well, it would take a brave order from the President to bury these banks but not from other federal people who have remained in close contact with bank executives.

Fourth, letting them fail and eventually taking them over would destroy investor confidence. No one would want to put their money on a company only to be compensated for a tiny fraction of the total investments he made. This creates a negative perception in the free market and ultimately leads to the demise of businesses.

Fifth, everyone is concerned over nationalizing these banks. Creditors would have no choice but to follow what the government has in store for them even if it means going home broke.

It’s not that we don’t see any point on the ideas of Rep. Carolyn Maloney, Joseph Stiglitz and Simon Johnson on breaking up these banks. It’s these reasons that prevent banks from getting drowned. Sink the boat and you’ll have few lifesavers to pass around.

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