Instead of bailing out the institutions, why didn’t the government just let them fail and give the money directly to the people hurt by the bank’s mismanagement? Why were the banks’ protected? Doesn’t this kind of protection incentivize banks to act recklessly in the future?
In: Economics
You’re driving out in the middle of the woods. Your cars headlights break, and in the dark you get into an accident. The car can drive (other than the broken headlights) but you might have a concussion. You’re not sure how bad it is, but concussions are dangerous and you should get to the hospital ASAP.
A passerby on a bicycle sees the accident and has the option to help. They could call an ambulance, which might take time. They could give you their bike, but you would be riding with a concussion. Or they could go to the store down the street, fix the headlight, and drive your car to the hospital.
Obviously the best option is to quickly fix the car and use that. It is already the right tool for the job and it’s also the least risky option. Because remember, your goal is to get a doctor help, not blame your mechanic for letting the headlight break. You can worry about making sure it doesn’t break again after you get medical care.
In this analogy, the car is the banks. They were already set up to service people and their banking needs. If you fix the cause of their distress, you fix the immediate problem. Then after there is no more danger you can work on a long term or permanent fix.
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