why did we have to buyout the banks, what would of happened if we just let them crash?

If governments allow their banks to collapsed, their financial systems will go into a crisis and their economies thrown into deep recession.

In the UK after the government had bailed out RBS, they decided to roped in all British banks so that they can start lending to each other. When certain private banks have reservations to lend to each other, PM Brown summoned the chiefs of all British banks to demand that they lend to each other.

The Treasury and the Chancellor also issued the same instruction.

The FSA changed the capital Tier 1 requirements and demand banks to recapitalised their balance sheets.

HSBC,Europe's biggest bank turn to its huge reserved.

Barclays turn to Middle Eastern investors and sold valuable assets in order to strengthened its Balance Sheet.

During the autumn of 2008, Barclays share price was sold limit downs many times to 50p, but due to the quick actions of its experienced top managements and with the support of shareholders it was able to stop its share price was reversed to its normal price now at over 360p, after releasing its profits and its strong balance sheet.

RBS ended up 70% government owned.

Lloyds TSB and later changed its name after its merger with HBOS to Lloyds Banking Group sort government's help and ended up 40% government owned.

Obviously, the governments plan to control banks had not succeed. Now, the Bank of England is at odds with the government on the retail banking and the investment banking status and their functioning. The FSA wants banks to write 'living will' in the event they may collapsed in future. PM Brown wants banks to defer their bonus payments as preference to lend more money to the people.

This is what is happening to the banking system in the UK now.

The reason is something that economists call "external costs": the external costs are the impact on people and companies that are not directly involved in an event, such as a crash of the banking system.

Over the weekend of 13 September 2008 the US government let the investment bank Lehman Brothers go into default, refusing to bail out the company. The shock waves going through the financial markets were dramatic and almost caused the downfall of the entire financial system, or worse.

The US Treasury Secretary Henry Paulson and the then President of the New York Federal Reserve Bank, Timothy Geithner and other key decision makers in the financial system, grossly and negligently underestimated the external costs of a bankruptcy of a commercial or investment bank of the size of Lehman. The senior management of Lehman in fact pointed out in a confidential memo sent to government officials that a bankruptcy of Lehman would lead to "massive global wealth destruction" and "retail/retirees assets are devastated".

This incident gives us an idea what might have happened if the government would also have refused to directly or indirectly bail out Bear Stearns, Merrill Lynch, Fannie Mae, Freddy Mac, AIG and others!

The financial system would likely have gone into cardiac arrest and the world economy thrown into a depression that the world has not seen so far.

After the consequences of the Lehman default became clear, actions by Bernanke, Paulson and Geithner helped stabilize equity and credit markets and very likely have prevented a deeper recession. As the lender of last resort, the Fed doubled its balance sheet to provide additional lending facilities to the banking system. The Treasury’s Troubled Asset Relief Program, or TARP, pumped almost $300 billion into the U.S. banking system. As a result, no major banks have failed.

Banks do a lot of good. They allow for credit. Most sales in most countries are based on credit. Without banks those sales wouldn't occur which means less demand for goods or services and a lot of people get poorer because they have no jobs anymore.

The funny thing about bank credit is that the bank lends money it doesn't even own. So think about what would happen if all the sudden jobless people above tried to dip into their savings...the banks wouldn't have the money it owes these people since it's all lent out. The safety net banks create disappears.

Banks work by using this system of lending out money it doesn't even own and managing it appropriately. What happened in this banking crisis is that banks stopped working like they should and got into trouble by giving credit to people who wouldn't pay back their loans and so banks had to give less credit to people who were creditworthy and then the crisis happened. A buyout though is simply giving banks the money to give back to it's good clients. Without that you'd see a crapstorm of poverty and unemployment.

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How bad could things get? No credit means no jobs. No student loans or vehicle financing no business debt no... a lot of things would just go.

Society revolves around funds. in case you went to the ATM and it replaced into empty you will then flow on your monetary enterprise. If there replaced right into a be conscious asserting "No funds on those premises, closed till extra be conscious", there would be a small crowd there. somebody would at last say "i've got have been given little ones to feed, i'll the food market and get what i choose. quickly you have 2000 to 3000 human beings looting the food market. it is not basically one million food market, that's all of them. There would basically not be adequate police or risk-free practices guards to contain them. This "snowball" of looting would improve. If the banks are nevertheless close, the only component of fee would be tinned or dried food, bottled water, a Kalashnikov and as many rounds of ammo as you may get. it may well be kill or be killed, the whole breakdown of society, regulation and order etc.