TENTATIVE THESIS STATEMENT
Owing to the astoundingly huge number of banking failure with over one hundred banks facing bankruptcy, bailouts pose a financial challenge to the American economy and the government should take stringent measures to regulate the banking industry.
I. The major causes of the bank failures include:
A. Imprudent Lending Policies
The special tax treatments which financial institutions receive from Treasury on bailouts encourage these institutions to engage in risky investments. These ultimately results in failure because they continue to enjoy tax returns until they have offset their losses.
B. Poor Investment Decisions
Financial institutions have engaged in poor investments which have contributed great to their failure. For example, the practices of trading in junk debt like hedge funds, which have caused the market to be illiquid; and high numbers of takeovers by private equity firms (Stern and Feldman 15).
C. Poor management policies
These can be exemplified by churning out taking place as a result of mergers and leveraged buyouts which do not solve the problem but only spread it out in the financial market. This is because in the event of a buyout or merger, the management is changed without finding a solution to the problem which may only complicate the problem.
This may occur as result of increase on the tax burden on consumers as a result of the bailouts of big banks.
II. The issue of who qualifies for the bailouts further fuels the problem of big bank failures and bailouts.
Big banks have been the beneficiaries of bailouts from Treasury with the promise of dividend payment to the government. However as revealed by McIntosh (7), many of them fail to repay these dividends and some are in danger of relapse. This puts in question the effectiveness of bailouts.
III. Bank failures and bailouts have major impact on the economy which include:
These may cause economic turmoil and recession. For example, failure of the ‘USA Home Mortgage Bubble’ that resulted in the failure of mortgage-backed securities.
B. Social consequences
High unemployment rates as a result of risky investment trends by financial institutions or as a result of failure (Stiglitz 22).
IV. In order to resolve the crisis of big bank failures the government should enforce,
A. Federal policies: There should be an introduction of new accounting policies like market value accounting, which could reflect the real performance of financial institutions in the banking industry.
B. Tax reforms- The tax policies should be reviewed so as to discourage banks from engaging in risky investment trends with the reassurance of bailouts with special tax treatments.
C. Controls through the Securities and Exchange Commission- This should be done with the aim introduction of regulations which will discipline the financial markets and policies which will help to govern the banking industry.
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