1) that's factually incorrect, 2 of the top five Wall Street firms failed (Lehman and Bear Stearns).
2) the other 3 (Goldman, Morgan Stanley, Merrill Lynch) would have failed after Lehman, the entire financial system had to be backstopped by the government. (If you look beyond pure securities firms, the largest insurance company (AIG) failed as well as the largest bank (Citibank - it effectively got nationalized and shareholders were wiped out, look at a stock price chart (http://finance.yahoo.com/q/bc?s=C&t=my&l=off&z=l...)
The lesson learned is that the financial system can't survive a failure like Lehman without a government backstop.
So, pick your poison, either 1) permanent government backstop and some regulation to go with, it, ie don't let bankers run leveraged hedge funds on the public dime, take all the profits in good times and stick taxpayers with the bill when it goes south.
Or 2) smaller banks that can fail without taking the whole system down.
How about (3), a government not run by Bush/Greenspan/Krugman/Obama/Bernanke, a government not intent on creating housing bubbles in the first place?
Let the banks go bust by all means, but let's also recognize that government regulation/incentives ($440B from Fannie Mae!) was a large part of what got us into this mess.
Fannie Mae, Freddie Mac and the federal Home Loan Banks --
the government-sponsored corporations that handle home
mortgages -- will increase their commitment to minority
markets by more than $440 billion, Bush said.
Under one of the initiatives launched by Freddie Mac,
consumers with poor credit will be able to obtain mortgages
with interest rates that automatically decline after a
period of consistent payments, he added.
To fight this recession the Fed needs more than a snapback;
it needs soaring household spending to offset moribund
business investment. And to do that, as Paul McCulley of
Pimco put it, Alan Greenspan needs to create a housing
bubble to replace the Nasdaq bubble.
Paul Krugman, 2002
Most people in the financial sector do not think Goldman, MS, or JPM would have failed without the bailout. Lehman and Bear Stearns did fail, but their failure was largely handled within the banking system itself (a lot of Lehman being bought by Barclays and Bear Stearns being absorbed by JPM).
And how many of those people benefited directly from the bailouts? The idea that banks can't be allowed to fail is the fundamental fallacy that has underpinned the last five years. Of course they will argue that they "needed" their noses in the public trough.
not sure what you're advocating...in the Great Depression banks failed, the depositors lost all their savings, triggering runs on other banks, etc., hence the name Great Depression. so that wasn't a very sound policy.
on the other hand a government backstop for a bunch of traders making giant risky bets with depositors' money so heads they win, tails we lose, is not a sound policy either.
somewhere there's a reasonable medium, collectively safeguard the payments system and bank deposits, without giving banks carte blanche to use depositors' money and government backup to make risky bets.
and don't let banks get so big that it's both an administrative nightmare to shut one down, and they have enough political power to thwart shutdowns and effective regulation.
I'd say the policy should be: reinstate glass-steigal on steroids. If and when banks fail, blow out the management and have unlimited FDIC insurance backstopped by the Fed. No need to apply discipline on the liability side of banking because it hurts main street. If the investment banks fail ( not commercial banks ) let them die. Whatever damage that causes to the macro economy, make up for it by providing stimulus projects/tax cuts as needed. Lets stop privatizing profits and socializing losses. BTW, you are right GS and JPM would have gone under if not for the bail outs. They were experiencing a classic bank run and not enough liquidity to support. A great opportunity to clean up wall street was missed. Instead the country was looted at the expense of main street and they got away with it. That is how it will look 100 years from now.
We will never know the truth. The CEO of every financial institution swears up and down about the strength of their company right up until the moment it goes bankrupt. Look at Jon Corzine and MF Global...
2) the other 3 (Goldman, Morgan Stanley, Merrill Lynch) would have failed after Lehman, the entire financial system had to be backstopped by the government. (If you look beyond pure securities firms, the largest insurance company (AIG) failed as well as the largest bank (Citibank - it effectively got nationalized and shareholders were wiped out, look at a stock price chart (http://finance.yahoo.com/q/bc?s=C&t=my&l=off&z=l...)
The lesson learned is that the financial system can't survive a failure like Lehman without a government backstop.
So, pick your poison, either 1) permanent government backstop and some regulation to go with, it, ie don't let bankers run leveraged hedge funds on the public dime, take all the profits in good times and stick taxpayers with the bill when it goes south.
Or 2) smaller banks that can fail without taking the whole system down.