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Bankruptcy means unable to pay one's bills, and writing down loans (assets) in most cases also means writing down liabilities
That is a bold assertion. Are you really sure most of the loans due to be written off contain an automatic put option in their refinancing?
In any event, writing off a loan means that someone, somewhere will not have the money he thought he had. That buck can stop in four places: With the government, with the private bondholders, with the private shareholders, or with the depositors of depository institutions.
The FDIC means that the first and last options are essentially equivalent. So the question is whether the government wants to make good on the claims of shareholders and bondholders to insolvent institutions, or not.
I vote for "not," and if that causes bank runs, well then there's nothing wrong with a bank run that won't be solved by confiscating the bank, decapitating its management (metaphorically or literally, depending on whether it's done by the government or an angry mob), and repudiating every liability not held by an industrial firm or as an insured deposit.
- Jake Friends come and go. Enemies accumulate.
our consumption and investment behavior is largely immune to the effects of another bank meltdown.
Ah.
As optimistic about the effects of Capitalism as ever.
And given the present decrepit state of the infrastructure of nominally first-world countries, you would run out of unemployed before you ran out of useful government projects. Possibly quite a long time before, depending on how aggressively you repudiate private sector debts.
If you have a Treasury with a drawer full of shovel-ready, useful infrastructure projects, then the Treasury can shoot the private banking sector in the back of the head, dump the corpse in a shallow grave and nothing excessively bad will happen (except maybe a coup d'etat), irrespective of where you are in the business cycle.
Because with sufficiently activist fiscal policy, you get to abolish the business cycle.
We need a banking system so that the fiscal authority can concentrate their attention on those tasks that a banking system cannot or should not be doing. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Not that you would want to do it unless your banks needed a lead pill delivered intercranially for other reasons.
Obviously we could shoot all the TBTF banks in the back of the head, and so long as we did it by taking them into receivership long enough for people to shift their accounts to small community banks and credit unions, there wouldn't be any massive calamity in the short term, and in the long term we'd be better off.
But shooting the entire private banking sector in the back of the head and having to recreate the entire sector from scratch ~ that seems likely to deepen the current depression. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
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