Pull the plug, bankrupt the USA
Bankruptcy is not an alternative in the USA
Too big to bankrupt
Banking in Iceland does not relate to banking in USA
These changes should allow the preservation of the financial system while eliminating most of the moral hazard, because the people who would be taking the risks would lose just as much as they would if they had been allowed to fail.
I agree that government bailouts would create instability if the regulatory environment is not also changed. It needs to be changed so that banks can't easily put taxpayers in this position in the first place.The problem with the bailouts is that it initially forced other banks to clean up Lehman Brother's mess. Government bailouts may work in the short-run, but when you raise the moral standard you raise the riskiness of investments and create a more unstable financial system.
Iceland has the advantage of being a tiny, isolated economy which can do what it wants without widespread contagion across the global financial system. Most countries do not have that luxury.Iceland could not afford a bailout, but the economy is starting to improve, albeit slowly.
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This would certainly be an improvement over the current system. This is not what happened in the US or in Iceland. However, borrowers would be less careful as well.
The banks need to know that they won't get off when they do stupid things. They may still do stupid things, but there would be far less of it.