Why Not Let Insolvent Banks Fail?

Over the weekend, Senators Richard Shelby and John McCain finally floated the idea of letting big banks fail.  After spending billions of taxpayer dollars trying to prop up large but insolvent financial institutions, 2 of 100 Senators are finally realizing the black hole they have created.

The debate is now turning to nationalization.  Let's get some terminology straight - nationalization in this context does not mean having the government run the banks indefinitely. It is a temporary solution to provide an orderly liqidation of the banks.  We do it all the time with smaller banks that become insolvent.  That is the role of the FDIC.  The problem is that the FDIC is ill equiped to handle an insolvency of the size of Citigroup, Bank of America, or even non-bank groups like AIG.  

The solution is to let the banks fail under government control.  Government liquidation oversight will allow time for a replacement banking system to become established.  As part of the process, the governement could even create a new banking system now.  In fact, we already have a banking system in place - local community banks!

The real debate is the difference between Wall Street and Main Street.  Wall Street is dominated by a few very large institutions seeking the largest deals at the upper echelon of finance.  Without doubt some portion of our economy is dependent upon the financing brought by some of these large institutions.  On the other hand, we are told all the time that small business is the engine of the economy.  Small business creates jobs.  It is also true that small business does not do business with Wall Street.

Who finances small business?  The thousands of smaller regional and local banks!  That is right, our economy is not solely dependent upon Wall Street.  It is dependent upon Main Street.  The FDIC does not hesitate to pull the plug on Main Street banks, so why are we hesitating to pull the plug on Wall Street banks?  There is no reason to do so.  Lending will still occur, commerce will continue.  We will be healthier if we stop the bleeding.

Congress needs to understand that we cannot keep using taxpayer funds to replace business losses incurred by large Wall Street financial institutions.  Whether you take our money by taxation or by devaluing currency by printing more, or increase costs by borrowing more, the result is the same:  Main Street bears the brunt of the government action.  There is no just reason for shifting the burden of bad business decisions to the general public.  The failure to allow banks to fail is the failure to govern.  Stop the bleeding now.