Wednesday, October 28, 2009

Bank Bailouts: Should Banks be Forced to Pay Early?

Banks aren’t necessarily the most responsible institutions. After all, they had to get rescued by the government for failing to behave the way banks should and making risky decisions. Now that they are showing profits, many argue that they should be responsible for once and pay back the bailout money sooner than their original deadline and raise private capital as usual.

When the government sees this money back, it can help fund stimulus programs and control the national debt. However, given the central role of bank failure in creating the current crisis, pulling this funding back before there is a definite and consistent improvement could prompt a horrible economic reaction.

Banks are doing better than they were. There’s no doubt about it. In fact, according to the New York Times, JP Morgan Chase earned $3.6 billion in the last quarter, and ten big financial institutions paid back nearly $70 billion this year. It’s easy to understand why many are upset. With worries about the national debt and concerns about how Obama’s stimulus package is going to affect the future of our economy, it’s not unfair to wonder why the banks are taking so long.

To some extent, this is an important concern. However, these banks just got back on their feet. You’d think most Americans just weren’t around a year ago when some wondered whether or not this was the end of our economy. Banks were a major driving factor behind the financial crisis. When they don’t operate properly, when they fail, we can be pushed into a recession as we were before. Regulators have warned that “huge losses tied to commercial real estate, home mortgages and defaults on credit cards” are still present, and that banks are just not ready. Those Treasury officers who disagree have a right to their opinion, but it’s shocking how easily they would accept that risk.

Months of profit don’t prove that our banks are permanently moving in the right direction. Before we risk putting the U.S. economy back in turmoil by placing unnecessary stress on the banks (the money isn’t due back yet, after all), I would like to see consistent, high profits, and positive signals from the economy as a whole. Those who are in favor of forcing banks to pay back that money early should be fully ready and willing to accept the risk that comes with it. It’s more than possible that it would extend or deepen the recession we’re already in, and that’s certainly not worth it for a little extra funding. 


  1. Another question I'd like to pose and eventually address in one of my posts is why we necessarily have to rely on big banks. How about local community banks or even cooperative banks tied to local stakeholders? Is it necessary better to be so global and large? We see that the "innovations" big banks have pushed are not necessarily good for our world. We might even create better innovations at the local level.

  2. Banks may be what got us into this financial crisis, but it's also the only thing that can get us out of it. If America expects this bailout, then they must give it more time. Banks recieved the bailouts becaus they were in dire trouble, and the Obama administration is doing the right thing by taking a wait-and-see approach before demanding the money back. Banks aren't anywhere near the deadline of when they need to pay back the bailout money, so I feel it's very immature for naysayers to asking banks to pay the money back already. Yes, banks like J.P. Morgan did better this quarter than last quarter, and the financial institutions look like they're being dragged out of the quagmire they were in a just a year ago. This is evidence that the bailout is working, and that we need to give the banks time to fully recover before demanding repayment. Otherwise, we're taking a major risk of our economy doing a tail dive once again.