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Why Governments Bail Out Banks Essay

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Why governments bail out banks
How come conservative American politicians, avowed believers in the free market, are busy propping up investment banks and nationalising insurance companies? Are they just helping out their rich buddies at taxpayers' expense? The old story of capitalising the profits and socialising the losses? But, if so, how come they're letting some outfits go to the wall while bailing out others? And while we're on the subject, how come central banks that profess to be terribly worried about inflation - including our own - are flooding the market with liquidity? According to the ideal, the way the capitalist system should work is that it's good luck to them when the capitalists make huge profits, but when they make losses and go out backwards, it's tough luck. They get neither envy nor sympathy. Advertisement

In reality, it doesn't work like that and never has. We don't live in a pure free-market economy. We live in what used to be called a "mixed economy", where markets operate within regulatory frameworks set by governments and governments perform some functions themselves rather than leaving them to the private sector. This is particularly so when it comes to banks. Banks are different. Banks provide the bloodstream of the economy. All of us use them as repositories for o...

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