Bailouts

SLUSK

I do not have a degree in economics so can you people with a degree in economics tell me why it is necessary to take money via taxation from competent people and give it to the incompetent who's businesses have failed?

Why is it good for the economy to take money from the competent and give it to the incompetent?

Flamed Diving

Hi Slusk, welcome to Banking 101. As you can see, in an economy we have those with surplus income (left) and those with deficit income (right). Net Lenders (NL) deposit capital (K) in a bank and receive K(1+i) in return, where i is nominal interest. The bank, in turn, lends this K to the Net Borrower (NB) and receives K(1+(i+a)) in return, with ‘a’ being the banks profit. Some may say that NL is not getting a good deal, since they are missing out on that ‘a’. Why not sidestep the bank and go straight to that NB?

But how do they find each other? Advertise? Attend conferences and fairs? Yes, but all of these involve transaction costs (t). If t≥a, then the NL will be better off just putting his money in the bank, and letting them do the legwork. This is why financial systems are important, because they make life easier for everyone involved. Right now, they are in a mess, no matter who created it. To take positive action may seem immoral , but to do nothing only further damages those who acted prudently by denying them access to a functioning financial system.

SLUSK

When a company goes bankrupt there is a liquidation process where other companies buy the assets of bankrupt companies. See no reason you could not do the same for banks.

Flamed Diving

Poor NB and NL...