I actually think it's you that has misunderstood.

when you say this: "they perform the valuable service of making risky investments that other people can't"

What do you mean by risky investments? If you mean the bank risks losing money on them, that's countered by the point the person you are responding to made here: "in this day and age we hardly ever let large companies suffer the consequences of a bad investment "

What that means is, if you loan money and the business or person you loan to fails to repay, and the government bails you out by paying you the amount you were owed, did you actually risk anything at all?

Mortgages are indeed the canonical example - it's why the bank bailout that paid the banks that took the risks and failed is a perfect example of just this kind of risk mitigation.

It's worse, though, because on an individual level the banker has extremely minimal risk with their investments and loans. JP Morgan may or may not be at risk if they invest tons of money foolishly, but Jack the banker at JP Morgan has risked exactly $0 of their personal capital on the same bet. If the bet succeeds, Jack makes a million dollars. If the bet fails, MAYBE Jack gets fired. More often, he gets another crack at it because things don't always go well and the company has an appetite for this kind of risk.

> What do you mean by risky investments? If you mean the bank risks losing money on them, that's countered by the point the person you are responding to made here: "in this day and age we hardly ever let large companies suffer the consequences of a bad investment "

I kinda glossed over that under the assumption that it was meant as rhetoric regarding the 2008 crisis. It's definitely not true as a literal claim; banks quite regularly write off consumer debt that can't be collected or corporate investments that didn't work out. When you stop paying your credit card, or when WeWork ends up not being worth the price tag, the government doesn't step in to cover the bill. (They do step in for mortgages, and I agree they shouldn't.)

> It's worse, though, because on an individual level the banker has extremely minimal risk with their investments and loans. JP Morgan may or may not be at risk if they invest tons of money foolishly, but Jack the banker at JP Morgan has risked exactly $0 of their personal capital on the same bet. If the bet succeeds, Jack makes a million dollars. If the bet fails, MAYBE Jack gets fired. More often, he gets another crack at it because things don't always go well and the company has an appetite for this kind of risk.

This is definitely a real and important problem.

I can see why you would gloss it over as I agree, it's not something that happens more often than not. However, I do think there is a moral hazard to it in the first place, and I think you can start to see the results in the Chinese market today.

>When you stop paying your credit card, or when WeWork ends up not being worth the price tag, the government doesn't step in to cover the bill.

I would append "usually" to that. The government doesn't "usually" step in. They do sometimes. They've done it twice across major industries over the last 14 years that I can see at the federal level, and more often individually, the latter usually dependent on industry and business relationship with the government. The risk there is pretty massive each time, though, and I don't think people fully appreciate it. Even if it's more of a perception issue, it poses serious problems.

For example, there are a number of people in this thread and millions nationwide that believe when a bank messes up the government will save the bank. That's an issue because it erodes confidence in the government while putting undue confidence in the stability of the banking industry. The more this happens, the worse the potential outcomes.

This still begs the question. Risk is about unexpected loss of investment, which means at its core it's about the moral and physical consequences of losing money. If the consequences of risk are not actually felt, materially, by financiers, but are felt, materially, by people who partake in the deal, why aren't those ordinary people hedged accordingly? If you want to argue economics, it's clear all this does is allow banks to take on riskier and riskier deals at no consequence. The student loan crisis is an example of that.

Again, it really has nothing to do with morality or just deserts. Risk management is just a valuable thing that banks produce. They take risky deals, and manage those deals to try and make sure that nobody has to materially feel the risk. Sometimes they fail, and they're rightly criticized for that, but more often they succeed.

The student loan crisis is a good example of where people's misunderstandings of finance lead them astray. There's a pervasive idea that the crisis is related to banks making it irresponsibly easy to get a loan. But since 2010, the vast majority of new student loans have come directly from the Department of Education, generally with lower prices than private lenders offer.

Who said anything about 'morality'? The evidence of disaster of letting people with excess wealth make loans they don't suffer consequences for is everywhere. To be a reductionist and say 'risk management is just x, what's the problem?' is lazy.

Oh, and I was talking about the government, not banks. They caused the student loan crisis. It doesn't matter though, since my point is about any entity with excess wealth. I don't care about banks in particular.