Wednesday, December 12, 2012

Bank bailouts should NOT be a role of the government -- an essay


INTRODUCTION
     Governments in the United States and a number of European countries have spent a lot of money bailing out banks. The primary reasons for these bailouts according to them are: to maintain investor confidence in credit markets, prevent the collapse of financial institutions, support economic growth, protect taxpayers, and help home owners. The governments' reasoning may sound wise but in my opinion, they actually mean to do the opposite of all these "sweet-sounding" reasons that hide their real motives.

AIM
     The aim of this essay is to discuss and argue that bank bailouts should not be a role of government. In my discussion, I will explain the main points to support my argument and then come up with a conclusion at the end. 

DISCUSSION

Unfair to the public     When banks earn profits from their investments, they don't give a share of profits to the general public. Banks which made bad investment decisions should be ready to accept the consequences of their decisions. The government should not use the hard-earned taxpayers' money to rescue banks that are losing their businesses. This is very unfair to the public.

Burden to the taxpayers

     If the banks can not sell the mortgages, they should find a way to solve their problems. Just because nobody wants to buy these mortgages, the government should not resort to using public funds from taxpayers to get the banks out of debt. If there have been certain provisions so that whenever the taxpayers' money is used for bailout, the taxpayers should have a share of ownership in the bank. But this is not the case. Instead of a share of ownership, the public gets a share of burden.

Governments create mistrust in banks

     The fact that government is bailing out banks is actually a red flag. It is an indication that something could go wrong in the bailed out bank in the near future. As a result, instead of "maintaining the investor confidence" or "preventing the collapse of financial institutions" as the government says, it is actually making the public not to trust the bank and in effect, leading to the collapse of financial institutions because of the reduction or loss of customers. 

Increase in deficit

     When the government uses the taxpayers' money to bail out failing banks, it will have big impact on the nation's budget, it will increase the deficit and will in turn lower down the value of the currency. Other major effects of a budget deficit are increased borrowing, budget cuts, higher taxes, higher interest rates, higher interest payments, all of which are to the detriment of the public.

Better alternatives


1. Lowering interest rates

     The government can help the homeowners who had loans by lowering the interest rates on their loans. This would ease the financial burden of homeowners while allowing them to build equity on their homes. When the housing market improves, the homeowner can sell the home with profit which in turn can be used to repay the government.

2. Bank recapitalization

     Another good alternative to bailout is bank recapitalization. By re-structuring the bank's debt, its capital can be stabilized. There are many ways of recapitalization, one example is to remove preferred shares and replace them with bonds. Long-term equity investment in the banking sector is another way.

CONCLUSION
     The reasoning of the government sounds favorable to taxpayers, homeowners, and the general public. They make it appear harmless but in reality it is so unfair to the public, a heavy burden to taxpayers, creates mistrust in banks, and increases the deficit. Also, there are better alternatives such as lowering interest rates and bank recapitalization. Therefore, bank bailouts should not be a role of the government.

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