IndyMac Bank, with $32 billion in assets ... became the third-largest bank to
fail in American history and the fifth bank failure so far this year.
The catch-22 with banking is this. If a bank collapses, it can take other banks with it - potentially triggering a wave of bank failures that hurts the whole economy. If a community does not intervene and bail out the bank, it risks a widespread economic downturn. If a community does intervene and bail out the bank, it might encourage risk-taking among banks who are aware that they'll be bailed out.
Perhaps I am too simplistic, but couldn't communities go far in mitigating this moral hazard with the following simple strategy? Bail out banks in order to mitigate the spread of bank failures but also make it clear to executives of the bank that they'll be liable for serious penalties (even jail time?) if they've taken risks that put the bank in a position of needing to be rescued.
Bailing out banks costs taxpayers billions, whereas actual bank robbery usually costs only thousands. It is, oddly, a form of bank robbery when executives accept outrageous risks that won't, in the end, be a risk to them. We already have laws for bank robbers. Perhaps it is simply time to re-define who those people are.