Reply To: Basic Economic Questions


1. If a bank is holding a loan on which the borrower defaults, then the bank’s equity is reduced. If enough of its loans are bad, then the bank becomes insolvent. This alone, separate from the bad loan problem inspiring bank runs (which it doesn’t seem to do in the age of government deposit insurance), can bankrupt a bank. You are correct that smaller banks tend to be more prudent than large banks and larger banks more prudent than the largest-politically-connected banks because only the latter have an implicit government bailout.

2. In principle, it’s possible for anyone to roll over debt and reschedule payments. Mortgage refinancing is a big market. Credit card debts can be shifted from higher to lower interest cards. And so on.

3. Whether the government puts the bailout funds into its budget or has the Federal Reserve issue new money, command over resources is shifted away from producers and toward the government and bailout recipients. Since the financial collapse in 2008, the bailout funds in the budget were paid for by debt, not taxes. This means that private investment was displaced instead of reducing taxpayer incomes. Monetary inflation by the Fed transfers income from later recipients of the new money toward early recipients of the new money.

4. In the unhampered market, an enterprise gets larger by satisfying the preferences of more customers better than other enterprises. In our hampered market economy, an enterprise can also take the political route to success, satisfying the desires of state officials and obtaining in return political privileges over its rivals.

Take a look at Murray Rothbard’s book, A History of Money and Banking in the U.S.: