Can you give some examples of where a country defaulted and was worse off? I think most recently Iceland defaulted and they seem to be doing alright - but maybe given it's size it doesn't really count.
Iceland didn't default. They let their commercial banks die without intervention from the government. Also known as what the US Treasury should have done in 2008. If something is too big to fail - it must be killed immediately.
> If something is too big to fail - it must be killed immediately.
No, if its too big to fail, it must not be allowed to fail -- but also must be as expeditiously as possible broken up into units which are not too big to fail.
> Kind of like gradually splitting up your giant monster truck Java thing running all your endpoints into a variety of microservices.
That's a perfectly apt analogy. "Too big to fail = must be killed immediately" is like saying if you have an Java monolith that is a SPOF for your entire business, you must immediately blow up the server running it to protect yourself from the danger of it failing later...
I am afraid you are wrong. Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached.
> Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached.
"Too big to fail" -- if they genuinely are [0] -- banks are not in a position to blackmail anyone into bailing them out; the danger of them failing is indirect effects of that failure, not actions the bank triggers if it is not bailed out -- its not blackmail. While policymakers have a strong public-interest incentive to prevent them from failing (that's literally what "too big to fail" describes), they have a similar public interest incentive to take steps to make sure that they aren't in the position to choose between similar failures and costly bailouts in the future -- and, quite often, the way that manifests is through conditions on the bailout which can extend as far as government taking control of the institution it is bailing out.
This is born out by the past history of US government bailouts of institutions that were deemed to critical to the economy to fail, many of which had management conditions attached, and some of which extended to government taking significant control of the entity for some period, and those who previously controlled the entity losing out -- the entity (itself a legal fiction created by government) was preserved, the actual people the entity belonged to were not always bailed out.
There are times when bailouts had no or weak conditions, which may be a policy failure, but clearly does not demonstrate that imposing conditions on bailouts is impossible.
[0] "Too big to fail" can also be an pretext for policy-maker favors to people with whom they have personal, social-class, or other connections, rather than a genuine fact, in which case its still not blackmail, but a whole different problem.
But you're moving the goalposts on this discussion. The question wasn't the impact on the global economy; it was the impact on the national one. So the Iceland example is directly relevant.
The reason is that the global financial institutions are arguably more important than national ones. If Icelandic banking institutions fail, their economy can still be serviced by global banking institutions.
Technically that is true for America too. American economy could be serviced by foreign banks.
However, the American banking industry is big enough to knock out the entire global financial system. Iceland's isn't. Just one bank, Lehman Brother, almost caused the whole house of cards to come down.
Part of this discussion seems to be whether or not the Treasury should have done what Iceland did, and I'm just trying to point out that they had valid reasons to do anything but that.
Well, yes, American banks were able to threaten a lot more mutually-assured destruction so as to intimidate the government into continuation of their too-big-to-fail status.
Not sure how that's an argument in favor of paying the Danegeld though.
>Not sure how that's an argument in favor of paying the Danegeld though.
Because not paying it would likely have tipped an already precarious global economy further towards depression, and that's not acceptable. So you pay the Danes off until you can actually kill them without killing yourself in the process.
Just so we're on the same page, do you understand the logic behind not paying extortionists? The "later" doesn't come, and the payment only makes them better at extorting you, and draws in more people to try the same. You typically won't get a better opportunity.
If you come up with a rationalization for how you absolutely must defer the reckoning today, why won't you come up with one tomorrow as well?
The US government could have done something about the banks after having bailed them out without wreaking havoc, but they didn't. Not because the government didn't have the power to, but because it apparently didn't have the will.
Simply letting the US banking industry collapse and take the country with it as a power play of refusal to give in to "extortion" would have been insane.
>The US government could have done something about the banks after having bailed them out without wreaking havoc, but they didn't.
That's exactly what's under dispute, especially given the multiple meanings of the term "could" here.
The problem with paying the Danegeld is (among other things) that the extortionist becomes more capable; that means it's less true that "we 'could' shut them down".
In this case, it means the banks have bought time to extend their influence, get more people to expect them to be around forever, borrow bigger amounts of money on the assumption that they can't die, make more acquisitions on the assumption of returns to TBTF status, make politicians more dependent on their campaign contributions, etc.
It's the exact mentality that "oh, they won't call our bluff because Everyone Knows that would be reckless" that allows this abuse to exist in the first place.
And what's worse, having given in, you now have to worry about non-bank orgs similarly positioning themselves!
There's a reason people have to be taught about the dangers of the Danegeld: because they all think they can just "fight for real later".
Less than 10 years out and people have already forgotten their history. That's so disheartening....
First, Lehman Brothers was allowed to collapse. That was huge and directly contradicts the revisionist history we hear about today. But it immediately became apparent that the system couldn't sustain another collapse like that.
Second, nonetheless Washington Mutual was allowed to collapse a week later.
Third, the Feds forced Bank of America to eat Merrill Lynch with patently illegal threats. But banks like operating in regulatory gray areas, and at the time were willing to take their own medicine.
Fourth, earlier that year Bank of America bought Countrywide, and since then regulators have been particularly brutal to BofA regarding Countrywide's practices prior to the acquisition.
Wells Fargo ate Wachovia. That was a good deal for Wells, but point being the Feds didn't prop up Wachovia, they just made sure it didn't crash and burn.
Citibank had to sell Bear Stearns at a loss (I think; feel free to correct me) with JP Morgan picking up substantial risk. Again, while not quite the same kind of shot-gun weeding as with Merrill Lynch, doubtless the Feds were pushy.
Fifth, while AIG wasn't allowed to collapse, the government took receivership and were relatively brutal to investors. There are still ongoing 5th Amendment Takings claims, and while morally it's repugnant the legal arguments are pretty good. Point being, it's another example where the govt didn't shirk their responsibilities in the way people claim.
Lots of other banks went under with investors losing money. You can't paint the entire banking industry as getting off scot-free just because some of the biggest (and most nimble) banks came out comparatively unscathed. As big as those banks are, the U.S. is unique in that it has a huge number of retail banks compared to any other country, and plenty of them and their investors got their comeuppance. (That history stems from the national bank debates in the late 18th and early 19th centuries, and ultimately President Andrew Jackson's resolution disfavoring a national bank. That system is still largely in place, even after the establishment of the Federal Reserve, though in the past decade it's been quickly consolidating, evolving, and becoming more tightly bound by Federal frameworks.)
There's alot more history to the financial crisis. I'm not saying things were fair, or that the banks were punished enough. My point is just that people very well understood the moral hazard at the time. Regulators did an arguably _reasonable_ job at mitigating that hazard as much as possible, even in hindsight.
Retail and transactional banking is a very integral part of modern Western civilization. The system is well over 1,000 years old (in a nearly identical form from a commercial and legal perspective) and predates all modern governments. It's organic rules are complex, opaque, and don't employ the same organizational models as modern systems like democracy, corporations, etc. You can't analyze the banking system so simplistically.
To be fair, if you are a weak medieval kingdom, militarily unable to fight off the vikings, the optimial strategy is some mix doing what it takes to stay alive while offering resistance where you can. Wessex paid Danegeld, but later won important victories. (But even later, England paid Danegeld before handed the whole country to Sweyn Forkbeard).
In the case of banks, a big problem is agency; governments and banks are co-dependent, and can evolve into a conspirancy to extract wealth from the public by whatever combination of tricks works.
Money is the main way in which modern humans collaborate to do useful work for each other. Governments and banks are both necessary for that system to function, and have co-evolved to rake off a (large!) fraction of that useful work in order to power their own operations. Neither side can afford to offend the other.
And in their situation, it helps that it was mostly the wealth of foreigners that was lost. Iceland would have been much much worse off if most of the country was involved with those banks in a meaningful manner.
