I did mention this in my earlier post:

In a sane world, banks would keep 100% of their on-demand deposits on hand. They could still make money when people choose different deposit options, and of course they will still rape you on ATM/Overdraft/Etc fees as well.

Really? You're saying that people who get loaned money by the bank don't actually do anything with it?

That's not quite what's going on though, right? It's more like Bob gave $15,000, you loaned it to me to by a car, and I bought a car. I bought a car for $15,000, but then it becomes only worth $10,000. Your books would say you have $15,000 in assets (your loan to me) and $15,000 in debt (to bob). That's not accurate though, because if I can't pay you back you'll take the car from me and sell it, but you can only get $10,000. So you're actually in the red $5,000.

I'd only be in the red $5000 if there was a 0% chance of you being able to pay me back. At 100% chance of repayment, I'd be ahead the interest on the loan. At some % below 100, I'd be even.

Traditionally banks had two types of deposits (they still do but FRB has heavily skewed towards one end). Demand and Time deposits. Demand deposits are when you can retrieve your money at any time ie a checking account. Time deposits are when the bank holds your money for X amount of time and you can only redeem after a certain date. Ie a CD. Banks can lend out time deposits and charge fees for holding demand deposits.

This is only true if you ignore loan loss reserves and mark-to-market accounting, which are two devices that make banks carry loans at a value that approximates their real worth.

That is not whats happening.

Dan the depositor puts 15,000 into a bank. The bank explicitly tells him that he can come and get his money at any time.
The bank lends 13,500 to Bill the borrower who buys a car from sam the salesman.
Sam deposits 13,500 into bank B- who also explicitly tell him that he can come get his money at any time. They then loan out 12,150 dollars to someone else.

Bank A has promised, on Dan's demand, $15,000 but have loaned away $13,500 which is NOT on demand. They inflate through false promises, not because of the trade involved in the car.

The paper money certainly exist, and people certainly spend it, but it is to the detriment of the value of everybody else's paper money, unlike in the case of creating a new car or lending hard currency.

Do you think the government regulators/bureaucrats who are dreaming up and approving these bailout schemes are spending their own money on them?

No.

Was that rhetorical?

Was this?

No. Are you just messing with me?

In response to this:

You said:

I felt like this was a claim that for the group of people running the banks (lets call them A) making sure that these banks didn't fail was a good thing. My question was more about people not in A, although I admit that it was not clear from my question.

Since it seemed like your response did not address the consequences for these people I had to figure why. Here is a list of what I came up with:

a. you didn't know
b. it was inconsequential so you felt no need to mention them
c. you knew but didn't want to tell me

I was pretty confident that you thought you knew, and I didn't have a reason why you would tell me if you knew since you had bothered to post a reply to begin with, so I settle on b. That prompted me to ask this:

Did this come across as snarky? I genuinely thought this might be the case. I understand that the bail will cost us money in taxes, but I’m wondering about the scenario where there is no bailout. What does that cost us? Might it be less than the cost of the bailout?

The bottom line is that I really don't understand what is so bad about having bad banks fail. It seems like in most (every?) other type of business, bad companies fail and good ones take their place. From some of the post in the thread I'm starting to understand that any new bank will do pretty much the same as the previous banks because that's pretty much what the government legislates.

I also hear/read that these banks are "too big to fail". I have no earthly idea how that can be. It could be true, but I need it explained to me.

What, if any, bad will be avoided by making sure these banks don't fail?

If the value of the collateral went down AND the borrower defaulted, and the total losses added up to more than the assets - liabilites = equity, THEN, the bank would be insolvent. Not before.

The bank is simply a middle man between the depositor and borrower. The depositor is investing his money with the borrower, and the bank is taking a cut in the middle.

You've basically figured it out on your own. The "to big to fail" line is just an emotional appeal to get people to buy into this stuff. Boogeymen. Vague, scary "bad things" will happen if we don't give the guy I play golf with at the country club $40 billion to bail out his failure of a bank. And so on.

If you don't own a bank, then the downside to letting the bank fail is pretty dang small. The downside to bailing them out is much, much worse.

Yeah I think people equate "too big to fail" with "too valuable to fail" meaning that if there is no bailout, we will all be in trouble, when in reality if a bank had good assets those would be bought up by other companies/individuals, ie there would be an automatic "bailout" of good assets by the free and open market.

Concrete example: AIG is deemed too big to fail. But there is no real damage done if they run out of operating cash and need to find someone to buy them up. A company/group of people would instantly buy up their good assets and manage them more efficiently.

People seem to think if the government takes over a company (Fannie/Freddie) it is for the better, when in fact if private individuals/companies RISKING THEIR OWN CAPITAL AND NOT TAXPAYER FUNDS (that's key) were allowed to do the "bailing out" we would ALL be better off. That includes CEOs (can still earn their salaries/parachutes), taxpayers (not on the hook for a huge loss, not to mention the dangerous precedent we are setting), and holders of these swaps or CDOs or insurance policies (because we would then have a real value on them). The only loser in a true free market system is government itself, hence the need to coax the public into the bailout (they didn't really even do this effectively which should speak volumes in itself.)

Just take a second to think over what I just wrote above. Who would you trust more in business, someone who is RISKING HIS/THEIR OWN CAPITAL (private people/corporations) or someone who effectively steals/forcibly borrows through taxes and then uses the bailout to further their own political goals? To be crystal clear, private companies have to run their business efficiently or else they will fail/go bankrupt. Government run/sponsored companies don't really have a need to run anything efficiently because if they need more money to keep it propped up they can simply print it up or tax us more. Eventually, the way we are headed, we are doomed to fail, as a few others have said above and most here seem to understand. Not only are we pumping more money and wasting it on inefficient projects (everything from public schools to the war on drugs to the waste that runs rampant via corruption), but we are also devaluing the very money we need to run an economy effectively. In tandem those will crush our economy and that in turn will ruin not only our reputation but our actual standing (military and otherwise) throughout the world.

It's often very telling what the politicians DON'T say and DON'T elaborate on. For example, we never really got a solid answer with concrete numbers on what it would mean if we didn't have a bailout. People blamed the 777 pt decline in the Dow on that fear, but most on Wall St must have known the bailout was coming, so I don't buy that. The reason is the politicians can't say "GDP will decline by 1-100% if we don't pass this bailout" because it might very well zoom up after a very short correction. So instead we get "lending will freeze up!" with no real numbers behind it, no long term numbers more than "credit lending has dropped by 5% this week" or something.

The only reason this works and will continue to work for the politicians is because people at large are very very results oriented and don't ask enough questions and then demand answers. The economy will probably enter a nice 5-7 year boom period coming up here and then it will cause 95% of the public to dismiss everything that is being discussed in this thread.

One last thing, can anyone imagine if we used the same logic government does when it comes to poker. My bankroll has become "too big to fail" even though I'm playing -ev poker. All I need is some more money when I run out and it's all good.

Again it's a double whammy of government waste/stupidity. Not only are we bailing out companies, which should never happen, but we are bailing out the WORST ones! Basically the public would rather back Gambling Addict/fish x than Phil Ivey because Ivey is greedy and the 2/4 limit players need some love.

If we just used some common sense and asked "what does company size have to do with ability to manage it?" we would all be better off. If you are a huge company but you go bankrupt doesn't that sound rather odd? Like you gained your "too big to fail" status through means that were unsustainable?

What stops this from turning into an infinite line of credit default swaps. Do people only insure an insurer of only so many insured?

+1

No, I'm pretty sure it's basically infinite. A podcast said it was in the area of 4 Trillion? I'm not positive on this, if somebody else who knows could speak up I'd appreciate it. I don't recall what podcast it was on.

Edit: found the podcast. It's very good if you've got an hour to learn.http://www.thislife.org/Radio_Episode.aspx?episode=365

by nielsio logic, i work at subway and get paid an hourly wage. a drug dealer comes in and gives subway $5 for a sandwich. subway gives me $.10 of that five dollars. i am now a drug dealer.

you do get a prize... you get to pay 10% more on your taxes for the 8 or 9 years so that the douchbags who wrote the credit swaps will still get to have houses in the hamptons.

precisely correct. just on this perspective alone, it is 100% that the ROI of the "bailout" (i.e. giveaway) is going to be somewhere around 40%