Back then — saner days, in my view — TBTF meant receivership, restructuring, orderly sale of assets and/or wind-down. BNE wasn’t given a sack of taxpayer $ to do with as it would — instead the government oversaw a process of separating the good from the bad, and, eventually, finding new owners for all the assets. Same kind of things that happened later to the S&Ls that failed.

In my opinion, what’s nonsensical now is not so much the idea that the government might want to prevent the calamitous meltdown of a large financial institution. It’s the current approach to doing so. How can you hand cash over to the management that is stymied by their situation, beholden to shareholders, etc., etc., and expect behavior that is in the interest of the public/government/taxpayers?

Another key difference is the amplifying effect of combining government insured deposit institutions (quasi public institutions, really) with risk-reward driven financial organizations. Government subsidy of high-risk financial businesses was never intended … but, allowing these kinds of organizations to combine has allowed it to happen. Glass Steagall should never have been repealed. Why can’t this be undone?

cheers,
Michael Brenner

The financial firms would pass any tax on to consumers and businesses, so while it would serve to sequester funds in advance of any financial meltdown, those funds will still be coming from, basically, taxpayers in the form of consumers. Your overdraft fee will move to $50 from $35 and Joe’s Gas Exploration Company will pay more for the hedge on gas prices.

The simplest action should be to create several clearly labeled tiers of banks, and with those liberated to use leverage and derivatives in a tier that will have slowly declining government guarantee, but heightened government and regulatory disclosure.

(The heightened publicity forcing firms to advertise, in effect, their own risky practices, which, if too obvious, will cause their trading partners to flee).

Consumers will evolve in the direction of those retail firms with full FDIC support, and those in need of more complex financial firms will drift towards the reclassified “uncovered” firms.

But human nature being what it is, firms will seek to grow large no matter, and you would likely still end up with a liquidity crunch that will impact everyone.

Yes. Having to accept bailouts or guarantees should be hard on the managers. The CEO and CFO should be required to work for $1/year. (Iacocca did that voluntarily, remember?) Others should take a haircut or be fired. Boards should be sacked or packed.

“Oh, we’ll lose our top talent!” Yeah, like you really need the people who got you into this mess.

Hear, hear!

Yes, there is a lot of “we can’t do this” or “we can’t do that” or “smart people can always get around the system”. I am old enough to remember when the Federal gov’t actually worked. If the current regulatory regime is ineffective, that can be changed. But not by simply tweaking here and there.

In 1984 Continental Illinois was explicitly deemed Too Big to Fail by the U. S. gov’t. The practice of bailing out banks that are too big or too connected to fail goes back at least to early 19th century England. The devastations of Tulip Mania and earlier bubbles were still painful memories back then.

My guess for a long time has been behind the scenes politicking by Summers, possibly aided by Geithner.

All of which serves to reinforce the notion that you are clear of any learning disfunction or perceptual malady. :-)

Now on to the deeper reason for this poverty of thought you describe: That the sense we are stuck with the current economic paradigm is the direct consequence of an inability to think outside the box politically, not economically! Its not that the paralysis here comes about as the result of a paucity of economic imagination. There are truly many well educated and intelligent folks here. It just that many of them have as yet to discern that the political order must be changed utterly before any meaningful approach to the economy can be formulated. A Congress and a President that does no more than whore to AIPAC and the financial, arms and drug interests is no government at all. They are employees, no more and no less. And the idea of there being an alternative provided by the existence of an opposition party is a fantasy that simply serves to funnel popular outrage into a black hole. All of the self-serving bacteria that run and manage this very corrupt system – every single one of them – must go if “ALL” are ever to benefit. And no election is apt to bring that kind of change about, you can be sure of that.

This tax also looks like one of the few new ones that I’d support these days. The trick is making the tax also a disincentive. Maybe a 25% tax on the bonus and compensation of the top 75% of employees? The company would pay the tax, not the employees. But somehow I think that those employees are benefiting more from the implicit guarantee than shareholders are.

“Old agricultural traditions hold that burning a little each year, thereby getting rid of some of the combustible materials, are much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall” if I were regulator, I would be thinking about a progressive tax on size.