A country's two largest commercial banks, which make-up 70 percent of the country's commercial banking system, have each issued hundreds of thousands of 30 year loans to homeowners at aninterest rate of 3percent peryear. Recently, the government has begun implementing an aggressive expansionary policy to encourage real economic growth. As a result of these actions, prices rise sharply and the inflation increases from 1 percent to 5 percent, which means the commercial banks' real interest rate on the 30-year loans fell from 2 percent to -2 percent. If the government does not step in and bail the banks out, the banks will go under. In your opinion, should the government step in and bail the banks out?

Notes:

1. This scenario is tiedto the"too-big-to-fail" situation. The former chair of the Federal Reserve, Ben Bernanke,stated that governments need to provide support for too-big-to-fail firms that are in jeopardy because if the government does not bail them out, the negative consequences for the economy as a whole are far greater than if the government bails out these institutions

2. "Let Pharaoh appoint commissionersover the land to take a fifthof the harvest of Egypt during the seven years of abundance.They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt,so that the country may not be ruined by the famine." (Genesis 41:34-36 NIV) - Be wise in preparing now for the uncertain future.