In 1929 the U.S. had 30,000 banks. 10,000 went bankrupt during the Depression. In 1929 Canada had 10 banks. 0 went bankrupt during the Depression. Restrictions on opening bank branches across state lines are nothing but an Incompetent Banker Full Employment Act. Banks need to be big to survive runs from panicking depositors and to diversify to reduce their exposure to problems in local economies. Insisting that banks be small and local is exactly as idiotically self-destructive as insisting that insurance companies be small and local. Bernie was wrong.
I see your point. But what happens when a big bank is mis-managed? In a normal free market economy, that bank should go out of business and the other well managed banks will pick up the market share. But that can not happen if a bank is too big to fail. All that happens is what we saw during 2008 when poor management gave themselves bonuses and bailouts for bad decisions.
And even worse than that. The scum that caused the whole calamity are still in positions to do the same thing again.
Yes, bailouts reduce short-term pain, but at the cost of teaching investors and managers to expect them and plan accordingly. How to best trade off those considerations is a question for a higher-level economist than anyone on this forum. But there's no conflict between the "don't let banks take advantage of being too big to fail" and the "don't make banks be too small" policies -- there's plenty of room in the middle for an economy with a lot of big banks and no super-sized ones, or alternately an economy with a lot of free-wheeling middle-sized banks and a few heavily regulated giants.
Well, hundreds and hundreds of poorly managed banks did go out of business or were shut down in the 2008-9. If the government hadn't helped the larger banks, IMO the one that would have gone out of business was BofA and maybe Chase. If that had happened, it would have caused chaos and a lot of FDIC payout for deposits. But we would have survived. The other banks who were better managed (US Bank, Beal, Wells Fargo, and etc.) would have slowly picked up the slack. The larger issue is that this would have blunted our recovery. Obama implemented TARP in order to restore faith in the financial system and speed up the recovery. I think that history will be very favorable for this decision.
Another point to keep in mind is that "fail" and "go out of business" are not the same thing. "In a normal free market economy, that bank should go out of business and the other well managed banks will pick up the market share. But that can not happen if a bank is too big to fail.", true; but "too big to fail" is a choice, not a natural phenomenon we have to just put up with. The way a normal free market economy would deal with a BofA failure is bankruptcy court. This is what bankruptcy is for. The shareholders' investments are wiped out and the uninsured creditors get pennies on the dollar, but that doesn't mean 4600 branches, a mountain's worth of computers, and 200,000 employees have to cease operations. The uninsured creditors and the insurer now owns those branches and computers, and the creditors now employ all those tellers and accountants, and they're free to continue operations themselves, or find a buyer, or sell off whatever they can in pieces. If a way can be found to keep the bank running, or most of it, then where's the harm in "letting BofA go out of business" as the saying goes, when all that actually went out of business is a legal fiction, BofA Corporation, which is just going to be promptly replaced by the very similar First National Bank of BofA Creditors, Inc.? Same assets, same customers, same low-level employees, same middle management, new top management, new shareholders.
And if the government thinks TARP is a better approach than bankruptcy, because of the ripple effects of "pennies on the dollar" on somebody who unwisely lent a billion dollars to BofA, the government is free to volunteer to be the buyer that the creditors sell BofA to, and to pay off the creditors exactly as much more than the "normal free market economy" price of BofA's unsecured D-rated debt that government economists calculate is optimal to restore faith in the financial system, speed up the recovery, and not create too much moral hazard from letting poor management give themselves bonuses. To the overall financial system that would look an awful lot like a TARP bailout, except that the shareholders and the top executives of BofA would all have been replaced. I'm not sure what the upside of keeping those guys in the picture was supposed to be; I hope Bush/Greenspan/Obama et al knew what they were doing and had a good reason. The point is, assuming we faced a stark choice between a classic bailout and BofA shutting down and leaving all its customers and creditors in the lurch is a false dilemma. There's a continuous spectrum of options in between the extremes.
