Too big to fail?

Too big to fail = you and I pay for Bank’s losses

How can we call this free markets when the big banks are being underwritten by the governments?!

Ah, but they are too big to fail because if one were to fail they would all come down like a pack of cards - this seems to be the consensus response.

It sounds like someone’s been held to ransom - we have this wonderfully clever banking system in which no major operator in the sector is allowed to fail. Next you’ll be telling me that no competition is allowed. But arguably we already have a situation where no competition is allowed.

If I were to team up with a few pals and start a bank, and market it as a new bank that has no hidden losses and is going to behave sensibly with your deposits, and ask lots of other friends to deposit their savings with our new bank. People would ask “ But are you underwritten by the government? And I mean properly underwritten, not just the paltry £32k or whatever..”

I might say “No. we’re just a new bank with no liabilities therefore we don’t have to be underwritten by the government.”

My potential customer might then say “Well I think I really want my bank deposits underwritten by the government, thanks but no thanks.”

We seem to have a situation where stupidity and recklessness are being rewarded. Taking the Northern Rock fiasco, we probably all know individuals who transferred large sums of money to the high interest savings accounts at the Rock in the aftermath of its failure.

I believe in free markets and the capitalist system, but probably the most important industry in our modern economy is having to be artificially protected from competition.

We got here because of the inherently flawed banking and monetary system that we have in place with its ability to create huge amounts of credit as if by magic. Its hard to believe that if you had talked along these lines only a year ago you would have been called a conspiracy doom monger.

My feeling is that by trying to artificially protect an industry and effectively stopping competition we are only preventing the industry from re-inventing itself - and a re-invention is what banking needs.