Thursday, August 11, 2011

Too big to fail

I am absolutely astounded, given the anemic state of our economy, that free market proponents are not making more of the Too Big to Fail (TBTF) regulation.

Financial companies and their critics will get another chance to comment on the criteria U.S. regulators will use to decide which large firms are so risky as to need stricter policing...

In a letter to a top House Republican Wednesday, a Treasury official assured the lawmaker that the updated guidance, when it’s finished, will be open to an additional public comment period, probably 60 days.

The criteria for determining which firms pose a risk to the financial system “will not be finalized until the Council has reviewed and considered those comments,” Amias Gerety, deputy assistant secretary for Treasury’s office of the Financial Stability Oversight Council, wrote to Rep. Randy Neugebauer (R., Texas), chairman of an investigative subcommittee the House Financial Services Committee. The council, known in Washington as FSOC, is a group of U.S. financial regulators charged with, among other things, picking out the riskiest financial firms. Treasury Secretary Timothy Geithner leads the council.

Finance Firms Can Argue Again That They’re Not Too-Big-To-Fail - Real Time Economics - WSJ
Thu, 11 Aug 2011 21:24:48 UTC

Playing favorites inevitably produces negative externalities we can not even imagine. And one of them must surely be cultural perception of corruption.

TBTF incents all manner of harmful behavior, along with the debt preservation and money printing required to solve it. These are direct regressive money transfers from taxpayers to investors and their managers, since both result in dollar devaluation.

But the most fundamental issue with TBTF is that it dissuades innovation and learning, especially from past mistakes. Maybe most importantly, it is a moral issue. If we believe markets are our source of innovation, efficiency and self-determinism, why would we give tenure to some of it, regardless of its merits or costs? There is no evidence that taking one's medicine now (bankruptcy) costs any more in the long run than delaying it. In fact, the reverse is most often true.

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