(the possible exception would be a sovereign state)

The influence of lobbies wouldn’t be affected by capping the size of financial institutions. The point of lobbies is to gather the many into one. And, did AIG use its size to exploit regulatory loopholes or did simply buy a savings and loan and thereby pass itself off as something small, innocuous and unthreatening.

I concede AIG did not actively prevent the impression that it was a large, powerful, AAA rated company from informing the marketing of its derivatives. But that has to do with marketing ethics and the quality of the products themselves.

I don’t know, James; I just don’t see it. I think containing leverage is far more important than capping assets, and of greatest importance is a thorough understanding of the financial product itself and its quality relative to other products.

The appropriate size is at least partly an empirical question. It would be good to look at the literature on relationship between bank size and performance, though it’s not obvious to me what the right metrics for evaluating performance would be. Perhaps they should be different for different banking functions. But in light of recent events, some measure of solvency is surely necessary.

This psychology was used skillfully in the fall–when people were told that “the world would end as we know it” by the bank cartel, we the people lost our ability to reason…if we could have reasoned we would have been saying “good” this needs to end, let the smaller banks that aren’t involved in the cartel buy for pennies on the dollar the useful assets of the corrupt entities and lets use the governments balance sheet to help bet by in this difficult time–

instead, the word ‘nationalism” became the F word too terrible to discuss which added to the power of opening up the doors of our children’s future and saying to the bank cartel, “here, take it all” When we failed at that time, we also failed in the eyes of the world…the world was hoping for Obama to save us from this crime, but he looks like he is only a puppet to the bank cartel now…so the world is viewing us as corrupt….i personally want our country to ask for it’s integrity back, and that won’t happen until the crime is prosecuted…if it goes unprosecuted, it makes us, all us citizens guilty.

I think interdependency can create a negative network effect, or “reverse bandwagon” which exhibits damaging phenomena both temporally and on large scales. If true, as Drum argues, whether there’s one big bank or a tightly coupled set of thousand smaller ones, although Drum doesn’t say anything about network effects.

At the very least, an economy which benefitted from positive network effects might suffer severely if, because of fear of risk, these effects suddenly end, because every node wants to decouple from the rest of their neighbors. That sounds like an insignificant decision, but to the degree the interconnectedness produced real GDP, it’s a loss.

Bottom line, dancing in circles solves no problem except the problem of can we dance in circles?

Here is a list that can help to solving some of what ails our country:

1) Our president needs to publicly admit that the bank policies started in the fall are wrong, and that until further notice, all public/private partnerships need to stop–

a) and that there will be a public investigation on the actions taken in the fall by the joint decision of the fed and the treasury ranging from stalling on letting lehman brothers have bank holding status and denying them from a 6 billion dollar bridge loan, to all the public statements that were made which in effect acted like a lobby for TARP 1 and all of the trillions of dollars given to already insolvent institutions.

b) Retroactive accounting to which TARP 1 recipients were failed prior to Lehman publicly failing, and for those institutions that were buffered by the failing of Lehman, and subsequent free money through AIG, they need to pay all bank loans, and backstops immediately or withing 30 days (and the president needs to gat a law passed that could do this ) And any banks, bank hodling companies that cannot manage to do this will be taken into receivership.

c) Since the basis of the approach to “save the world” was flawed, there will be many complaits that will need to sorted out, and in time this will be done in time. But for now, the top priortity is to correct the damage of what has been done, and hold accountable the makers of this flawed approach which, unless unwound, is holding our children’s future hostage.

HOW CAN WE MOVE FORWARD WHEN A CRIME OF THIS MAGNITUDE IS GOING UNPUNISHED…? ALL ISSUES SEEM TO BE MORE REDHERRINGS TO DISTRACT FROM THE FACT THAT THERE WILL BE NO MORE TRUST FOR OUR COUNTRY UNTIL WE CALL OUT THE CRIMINALS.

This time in our history will be called THE AGE OF REDHERRINGS used to RAPE AND PILLAGE THE FUTURE OF AMERICA”

There are two lessons of AIG. One is that powerful lobby groups (the International Swaps and Derivatives Association, in this case), can get the regulation they want. The second is that powerful institutions (AIG, in this case) can exploit regulatory loopholes. Again, I think the lesson is you need simpler regulation (fewer loopholes) and less-powerful institutions.

There are not enough resources to save everyone. So it’s triage, saving the town first, then the careful skiers.

The two-tier approach starts in the rebuilding, and the reckless are not allowed to go in large groups, use inappropriate vehicles, etc.