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If the private banks never learn from history and keep giving credits to it's clients for overpriced acquisitions, and then they enter default why would the government give them free money or buy those banks?

If I buy overpriced apples to sell them in my fruit shop and I fail to sell them, the government will not bail me out and pay my debts.

Just as my company running the fruit shop should go bankrupt, those banks should go bankrupt, other private investors should buy their assets and start doing better banking business, removing that incompetent staff who buy (or give credits for buying) overpriced things (in this case: houses).

On a first thought, that's my conclusion. And also on a second and third thought.

The whole point of default and bankruptcy should be to allow those competent businesses to survive and those incompetent to leave the sector and do something else. And that looks like a fundamental piece of a working capitalist system that encourages the players to be competitive. Therefore the bailout of private banks looks like a bonus for incompetence. Sponsoring incompetents doesn't look like a good option for making the banking sector work well and totally not suitable for restoring confidence of customers in such banks.

Example: If Compaq is selling bad computers and Gateway is selling good computers, then Compaq should go bankrupt instead of getting government subsidies in order to keep being incompetent. Their owners can try to do something else, like for example Barbie toys, maybe they can do it better than making computers. Gateway will buy their assets and they will survive and grow because they are competent.

I would like to know the arguments used by the governments for bailing out the banks, like for example in Spain where they gave 100 billion Euro for the private banks.

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Because the banks are not loaning their own money but that of depositors. One may also argue that the depositors should know the risks and if their bank makes bad investments it is partly their fault so they cannot complain should they lose their deposits. But a functioning banking system is essential to the current economic system. The bankruptcy of a big bank would cause panic and banks runs, which because of fractional reserve banking would probably result in the insolvency of other banks, banks that perhaps made good investments but ones that cannot immediately be liquidated. After the closing of the banks considerably less savings would be deposited in financial institutions. This will hinder consumption because credit/debit card traffic would cease and getting investment funds would also be considerably more difficult.

So the governments have considered the damage the bankruptcy of a bank would cause to their economy and decided it is better to bail them out. ("Too big to fail.") Of course since banks have a very large revenue stream they can also afford lobbying for intervention as well, but this does not mean that the intervention is not beneficial to the public. Furthermore, if you lose your deposits you may very well (wrongly) blame the government, so a bail-out is also politically prudent.

If you are interested in what could be done I recommend reading about the Glass-Steagall act.

If you are not satisfied with my answer there are any number of conspiracy theories that offer unconvincing alternative explanations.

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  • $\begingroup$ "Because the banks are not loaning their own money but that of depositors" Nop, they loan the money they borrow at central banks. $\endgroup$
    – agemO
    Jul 24 '15 at 20:10
  • $\begingroup$ I want to comment the same statement as agemO commented. I've heard that banks had to pay debts to financial markets (example: PIMCO), so maybe they got money from there? I might make that a new question. $\endgroup$
    – Joe Jobs
    Jul 24 '15 at 20:16
  • $\begingroup$ If a part of their money is made of deposit, then the governments could only give them the amount of the deposit $\endgroup$
    – agemO
    Jul 24 '15 at 20:16
  • $\begingroup$ It's quite hard do believe that you can make the banking system a "functioning banking system" when you sponsor incompetents, keeping them into business and preventing those who can do competent business to replace the incompetents. In case of bankruptcy, the majority of the people have not much to lose in deposits, only the rich can lose a lot of money. The average Joe Sixpack is covered by the deposit insurance (100,000 Euro) anyways. If the government doesn't want panic and bank runs, they should put credible restrictions in place instead of rewarding the incompetents. $\endgroup$
    – Joe Jobs
    Jul 24 '15 at 20:35
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    $\begingroup$ Well if the bank system is not functioning I guess I should be very happy that my transactions still get through. @agemO I encourage you to make your own answer, but not about what should be, rather about what is. A good basis for that would be looking at some balance sheets to see where the money comes from: bankia.com/en/who-we-are/about-us/key-figures $\endgroup$
    – Giskard
    Jul 25 '15 at 6:00
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There were two substantial reasons why Britain led, and the world followed, in recapitalising the banking system.

The first is that a very large proportion of citizens' money on deposit at banks is protected by the State anyway, so the State was already liable for that cost.

The second is that the banks are responsible for carrying a very large proportion of transactions. And if a bank can't deal with other banks, either because it's insolvent or because it presents significant counter-party risk, it ceases to be part of the global network of transactions. If that network jams up, then a huge chunk of global economic activity ceases, both within the affected countries, and between them and the rest of the world. The consequential global depression would have been much deeper, and potentially even longer, than what came about.

There are a bunch of other things that happened, that needn't; and they made things worse (e.g. the open-ended bailout of bank bond-holders). And there were things that could have been done, that would have made things better, quicker, that weren't (e.g. the cancelling of the personal debts that triggered the massive liquidity crunch in the collateralised-debt markets). But in terms of the lessening of a global economic disaster, bank recapitalisation was very effective.

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