Matthew Yglesias has been floating an intriguing idea about financial institutions: are they too big to be allowed to exist? It’s a good point because all of these bail outs are setting a risky precedent. Just like it was widely accepted that the US Government would come to the aid of Freddie Mae and Fannie Mac if their futures were ever in doubt, investors will now expect the Government to come to the aid of any financial institution that it has previously bailed out. If they are too big to fail in 2008; then they’ll be too big to fail in 2020 too.
All of this makes the idea of ensuring that financial institutions are never too big to fail an intriguing idea. If a large company fails — it’s bad, a lot of people lose their jobs — but it shouldn’t be so bad that it sends the world’s economy into free fall.
Free marketeers will say that the idea is an attack against success. But when people are talking recession or even (the very small possibility of a) depression, the free marketeers don’t tend to get much attention.
Too big to exist may not ultimately be the answer, but it’s definitely worth discussing.
As a side note re: bailouts, I’m not a huge fan of them, but until someone comes up with a seriously compelling alternative, I don’t believe there’s much choice.