For three reasons:
1. They do not prevent bank failures, they increase the risk of bank failures. (see 2).
2. Bank executives behave differently if they know they will be bailed out in the event of a collapse. They take on additional risk that would not be taken if there was no prospect of a bail out.
3. The additional risk assumed under 2 is asymmetric. It potentially benefits the wealthy by much more than it benefits small depositors. If it goes bad, the bail out is funded by taxpayers.
There would be no better policy decision to improve risk management in banking than to stop all bank bail outs. Now and forever.
One thought on “Bank bail outs are insane”
Yeah, but who who are they actually bailing out? Likely the depositors, who had no say in the decisions of management.
What you are talking about are bailouts that retain management incentive payments, which is different to what is occuring in this case.