Forum Post: This is why the banks get bailouts.

I've been reading these topics and their replies for a couple of weeks now, and one thing that stands out in my mind is a common misconception about the bailing out of banks. I will relate my explanation to the GFC or 'great financial crisis' as it has been coined.

I'll try to keep this explanation quite succinct. And for the record i am a fence-sitter in regards to the OWS movement. Perhaps if the demands were clearer, i would decide. That's a different kettle of fish however and so here goes:

When a large amount of people begin to miss payments on their loans and declare bankruptcy (for whatever reason), a large strain is placed upon the bank which has loaned out this money and relied upon it's return with interest. This causes a bank to lose stability, and possibly collapse.

The collapse of one bank can essentially cause a 'domino effect'. Banks depend on stability provided by the public's confidence in them. Increasing foreclosures and declarations of bankruptcy decrease the public's confidence as a whole in the banking system. This causes for instance, a wave of withdrawals of people's savings, for the fear of the safety of their money (this is not necessarily what occurred in the US, however it CAN cause a bank collapse and as such is an example). The resulting strain upon other banks will inevitably cause them to collapse. The reasons for this are quite complex and varied, however it is a probable outcome.

Bottom line: banks collapse, economy collapses and the public is faced with skyrocketing unemployment and a rapidly decreasing standard of living. Famines can inevitably result.

The US is however not a free market economy. It is essentially a mixed market economy, in which banks run under regulation and constraints provided by the government. In order to prevent banks from collapsing, the Government provides certain banks with bailouts (a loan with interest) in order to keep their function 'fluid', ensuring for instance that they can still provide loans. These loans are essential in most people's buying of a house/car or starting businesses.

Bailouts are essentially not 'Government's helping out their banker friends'. Bailouts ensure the stability and function of the nation as a whole.

In conclusion: Bailout = Most keep their jobs, are able to buy food and eat, receive student loans for an education etc. No bailout = A large majority of the population stare at their empty dinner plates all day because they can no longer find jobs, receive an education etc.

Id like to finish by saying that despite whether or not i agree with the protests, i commend you for fighting for what you see as injustice in this world. It is lucky that you live in a country which allows you to speak out against the government without fear of oppression, allows your voice to be heard quite loudly, and does not quell protests with some of the force we have seen during the Arab Spring uprisings. All i aimed to do in this post was to educate as to why banks receive bailouts, and silence the incorrect assumption that they are a 'free payout for greedy banks'.

Thank you and good day.

-BY THE WAY IF ANYTHING IS INCORRECT PLEASE DON'T HESITATE TO COMMENT!

Extended Info and some questions. - I will add to these if people raise important points or questions.

Why were only some banks given bailouts, while smaller banks were left to crumble? The reasons behind this are simple, if merciless. Banks (or financial institutions) that were given bailouts, such as AIG, were seen to have a large and negative economic effect if they collapsed. Small banks would have relatively no effect, and so were not bailed out. Even large banks such as Lehman Brothers were seen to have little effect on the economy if they collapsed, and so were not given bailouts. Lehman brothers collapsed.

Why weren't the bank executives that engaged in unethical or illegal lending practices prosecuted? Really this depends as to the laws and general mindset of the federal government. In short: i do not know.

Have these banks paid back these bailouts? According to my knowledge most banks have either completely paid off these debts or are in the process of finalizing their payments. It's better to do your own research on this.