Simon Johnson writes:\u00a0Nearly seven years after the global financial crisis erupted, and more than five years after the passage of the Dodd-Frank financial-reform legislation in the United States, the cause of the crisis \u2013 the existence of banks that are \u201ctoo big to fail\u201d \u2013 has yet to be uprooted. As long as that remains the case, another disaster is only a matter of time.<\/p>\n
The term \u201ctoo big to fail\u201d dates back several decades, but it entered wide usage in the aftermath of the collapse of Lehman Brothers in September 2008. As problems spread throughout the financial system, the US authorities decided that some banks and other financial companies were so large relative to the economy that they were \u201csystemically important\u201d and could not be allowed to go bankrupt. Lehman failed, but AIG, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, and others were all rescued through various forms of massive \u2013 and unprecedented \u2013 government support.<\/p>\n
The official line at the time was \u201cnever again,\u201d which made sense in political and economic terms. These large financial firms were provided a scale of assistance that was not generally available to the nonfinancial corporate sector \u2013 and certainly not to families who found that the value of their assets (their homes) was below the value of their liabilities (their mortgages).<\/p>\n
If large, complex financial institutions continue to have an implicit government guarantee, many people \u2013 on both the right and the left \u2013 would agree that this is both unfair to other parts of the private sector and an inducement for big banks to engage again in excessive risk-taking. In the jargon of economics, this is \u201cmoral hazard.\u201d But no special training is needed to know that it is unwise and dangerous when bank executives get the upside (huge bonuses) when things go well and everyone else bears the downside risks (bailouts and recession). \u00a0\u00a0Regulate Banks for Success<\/strong><\/a><\/p>\n Simon Johnson writes:\u00a0Nearly seven years after the global financial crisis erupted, and more than five years after the passage of the Dodd-Frank financial-reform legislation in the United States, the cause of the crisis \u2013 the existence of banks that are … Continue reading ![\"Too](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/08\/Too-Big-to-Fail1.jpg\")
<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"