...they're pretty much vital to the economy and your average Joe is just regurgitating what he's heard from the media?

This is such a dumb way of looking at this issue.

Just because they are "vital" at the moment does not mean the structure leading to there present vitalness is optimal for society.

Pretty sure there is a way for them to still contribute without at the same time putting the whole stability of the financial system on the line when they **** up by making ****ing obviously dumb bets on house prices always going up.

Your basically making a very lazy false dichotomy.

Could you add some context to this like give an example of where government should have ignored the public perception of investment banks but did not?

Sorry I should probably clarify:

I know sweet FA about investment banking, the political crisis surrounding their failures, or about the financial industry other than the fact that they're clearly very important issues of our time and that they provoke a great deal of controversy and debate from both sides.

I honestly haven't got a clue either way.

What I was hoping to do was to spark a debate that would attract people who do know about these things to contribute to, and that I could then learn from.

Yeah very fair question; but I haven't got a clue to be honest. Anyone?

If you're that interested, the history of wall street is a pretty good book on how the government and investment banks have interacted over time.

Andrew Jackson ignoring the banks to close the Bank of US is one of the most avoidable predictable economic disasters in American history.

Cheers. Certainly sounds like a worthwhile read!

I'm talking in slightly more general terms however. With regard to the UK and Europe in particular.

Hell I don't even know if there are significant differences between investment banking systems and the relationships that they have with government in the two continents.

The oft-parroted line in the run-up to the recent election in the UK (re. the economic performance of the Labour party) was that the banking crisis and recession was caused by the sub-prime mortgage fiasco in the states and de-regulation of the banking sector in the UK, enabling the banks to be bailed out whilst the public lost a fortune on bankers being able to risk gobsmacking amounts of money.

True though this might be, I'll be the first to admit that I haven't got anywhere near the expertise to really challenge or examine it (although to be fair, I don't think most people do).

But yeah, I want to change that and learn a thing or two.

We're All Socialists Now

Rastamouse:

What you're dancing around is the "Too Big To Fail" conundrum. The more general question is whether taxpayers (that would be you and I) should be forced to bail out bankers - or anybody else - when they make "unwise" financial decisions, or whether it is better to let them go ahead and fail? (Economists and deep thinkers call this the "moral hazard" problem.) Clearly, in the most recent flirtation with economic calamity, the political class decided it was preferable to bail the bankers out. (Or as former Fed Chairman Ben Bernanke declared: "I do not intend to preside over Great Depression 2!")

This is my (very subjective) opinion, but I think what the Government did (in bailing out the banks) exposed the hypocrisy of folks like Alan Greenspan. Shortly before the 2008 collapse, Mr. Greenspan had written a book in which he extolled the virtues of our free enterprise system and argued for limited Government interference in the private sector. (I can only guess that by "limited" Government interference, Mr. Greenspan did not mean that certain "exceptions" would be allowed - like bailing out all his rich banker buddies ...) It was very interesting when Chairman Henry Waxman's House Financial Services Committee invited Mr. Greenspan to testify in early 2009. (I was watching the hearing live on C-SPAN.) Mr. Waxman's first question to Mr. Greenspan was simple and direct (paraphrasing slightly): "Mr. Greenspan, were you wrong?"

The "Maestro" froze for a good 20 seconds - mentally stumbling for an answer - as he obviously did not want to answer "Yes" to Congressman Waxman's question. Finally Mr. Greenspan muttered (again paraphrasing) "I just could not believe people would make decisions contrary to their best [financial] self interest." So Mr. Greenspan was saying, in effect, that the financial crisis happened not because of any failing on his part but because of sheer stupidity on the part of his fellow bankers.

So what we have now is a system where profits are privatized and losses (when they occur) become a "public" problem. Now that we're sliding down that slippery slope, it will only get worse. It's just a matter of time until taxpayers are going to get shafted with the bill for the millions of students who default on their student loans. It will be hard for Congress to say "No" to students (and their parents) after they've said "Yes" to the bankers.

Face it: We're all socialists now.

fyp

No, no we are not. I am not convinced that the politicians that rant against finance believe half the **** they say about banking and finance. It is red meat for the base.
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Students default on loans every day. The only pressure in Congress to forgive loans will be that created by the progressives who may see it as a way to reduce inequality or more importantly get votes. This student debt amount is a problem only because the government interfered on the market and guaranteed the loans. Of course the benefit was more college degrees.

Lastly, there is very little disagreement among economists regarding the bank bailouts(wise), TARP made the government money if you ignore autos, and reducing the size of banks so that they no longer are two big to fail costs the economy more than the incremental risk retained by the tax payer.

An investment bank is one that issue securities for clients, I think you mean all banks. Generally the problem is the public perception and government perception of banking and interest rates it is wrong to feed their greed. A guy today owning 2 million in assets, can go into margin use the free profits to buy about $5000 a month in free money given to them because the fed and government are under pressure to keep interest rates low. So the guy can buy 5 Teslas all off someone else's dime. Deadbeats buy homes, interest rates that should be 15% are 3%. Where does all this money come from the debt and cash holders. So grandma is thrown out of her assisted living facility. The poor are made more poor. The blue collar worker struggles. The middle class with their cars and homes are laughing all the way, blaming banks, while they ruining them and the country.

Allowing too big to fail is more than unwise. Much more than unwise. It’s an incentive to take unwarranted risk. And its not bailing out the bankers. Its their shareholders (you and I) and under certain circumstances, the general financial system as was the case in 2008.

Re: greenspan – of all the players, I’m not sure why you’re picking on him. The most extraordinary actor was Hank Paulson – not only a lifetime devotee of efficient theory of markets, but a career banker and former CEO of Goldman Sachs. The man who pulled the actual trigger on government intervention had not only lived the theory, but the practice of government non-interventionism.

And when you talk about student debt you have the stakeholders wrong, and there are some necessary clarifications. First, why do you think they will default? The comparison (bank leverage) was brought on by (among other things) an incentives problem (as you correctly point out, moral hazard). Second, student debt Ts&Cs are different from most other debt, in that bankruptcy does not absolve the debtors of their obligation to pay. They can restructure, but have little leverage. This is fundamentally different from any other kind of debt I am aware of. Third, if students do default en mass, it will be their creditors (again, mostly us via mutal funds and pensions) who will be stuck holding the bill. Not the students. Fourth, as a matter of fact, the congress voted against the measures that were undertaken by the fed and the treasury, which was the wrong thing to do. The entire financial system was buckling under the weight of frozen credit markets. If the government had not eventually coalesced we would still be living in the stone age.

Finally, based on factors described above, as well as a lack of data (at least in your statement above) IF student debt goes belly up en mass, I don’t have any reason to believe congress will act in the same way they did for the financial crisis of 08. For reasons mentioned above, the situation was completely different. Moreover, congress answers to a small number of rich white men who prop up their campains, not voters. That is evident from election results, campaign contributions, and voter approval raitings of congress.

steelhouse:

Here is the reason why interest rates are so low:

https://en.wikipedia.org/wiki/Financial_repression

Naturally it's unstated (and not admitted to) by politicians and Government bureaucrats such as Fed Chairman Janet Yellin, but financial repression is the current de facto economic policy of the United States. As economists Carmen Reinhardt and Ken Rogoff pointed out in their book: "This Time Is Different: 800 Years of Financial Folly," financial repression is how developed countries - and especially the Governments of developed countries - reduce the cost of massive debt loads incurred as a result of a financial crisis. Interest rates are reduced (by the central bank) in order to keep the debt servicing costs as low as possible. Rates remain artificially low as long as the debt/GDP ratio remains high.

How long will the United States remain in this low interest rate environment where savers are getting screwed? Professors Reinhardt and Rogoff state in "This Time Is Different" that the average period of time it takes for financial repression to work (in democracies and developed countries) is 21 years. (Japan's "lost decade" has been going on for over 20 years. Japan's debt/GDP ratio is running north of 200 percent.) Reinhardt and Rogoff note that the tipping point - the point where debt-to-GDP starts dragging down an economy - occurs around 78 percent. Once a developed country's debt/GDP ratio exceeds that number, the debt burden increasingly begins crushing the economy. As long as the United States continues running an annual budget deficit of over ONE TRILLION dollars (on a FOUR TRILLION+ DOLLAR budget), artificially low interest rates will probably remain in place.

The justification for doing this is that in the absence of financial repression members of Congress (and the President) would be forced to raise taxes steeply - in order to pay the skyrocketing cost of the interest on the debt. Think of it this way: How much would we taxpayers be forced to choke up if interest rates were at 10 percent rather than somewhere in the neighborhood of 1-3 percent?

Creating a system where too big to fail companies exist is unwise.