Dealing with the Menace of TBTF

Abstract

In April 2009 the chairperson of the FDIC, Sheila Bair, gave a speech at the Economic Club of New York, in which she suggested that the notion of too big to fail “should be tossed in the dustbin”. I could not agree more. To curtail the influence of financiers and the disproportionate size of the financial sector, TBTF must go. To stop the diversion of scarce resources from productive to parasitic activities, TBTF must go. To curtail rent-seeking unproductive activities, TBTF must go. To minimize the incidence of moral hazard, TBTF must go. To reduce the financial burden on future generations imposed by the malpractices of a small subset of the current generation, TBTF must go. To stop the reverse-Robin Hood transfer of wealth from the hard working majority to the minority of financial elites, TBTF must go. To stop rewarding recklessness, TBTF must go. To impose market discipline on financial institutions, TBTF must go. And to avoid other negative consequences of applying the TBTF doctrine, it must go. Too big to fail may be too problematic to address, but it must be addressed. According to Kay (2009b), it is “incompatible with democracy” and “it also destroys the dynamism that is the central achievement of the market economy”.