What would be actual consequences if banks (or other large companies) weren’t bailed out by the government. Would financial crashes be worse?
In: Economics
It would be worse in the short run but probably better in the long run? One thing about financial markets is that they’re not like regular markets, and perception matters more. If people think banks will fail, they will run to get their money out, causing their banks to fail. That doesn’t happen with other businesses. Regulating financial markets is tough because there are so many complicated transactions (many designed to evade regulation), so sometimes the government just has to accept a failure, spend taxpayer money to keep the failure from spreading, and move on.
That said, if they had never bailed out banks, then banks wouldn’t be engaging in behavior that makes crises more likely. If banks were allowed to fail, and even if the contagion spread, the government just said “we’ll reimburse the customers to an extent but F you, banks and bank shareholders” then banks would be a lot more careful about what they do. (The FDIC does this, protecting customers; many economists say that’s where the protection should stop.)
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