By Simon Johnson
Listening to US officials, talking to legal experts, and waiting for an intense Senate debate on financial reform to begin, you can easily form the impression that “too big to fail” adequately describes our most serious future systemic banking problems. It does not.
In September 2008, the large banks and quasi-banks at the heart of our financial system faced failure – and they were saved in the most immediate sense through actions taken by the Federal Reserve, but TARP (passed by Congress and run Treasury) also played a significant supporting role.
The Bush administration threw a small fiscal stimulus into the mix in early 2008, hoping to stave off recession; the Obama administration committed a much larger package at the start of 2009, aiming to prevent anything like a Second Great Depression. This fiscal policy response was in direct reaction to problems caused by the overextension and near failure of the financial system
Do not make the mistake – for example of Secretary Geithner, talking to the New Yorker – of thinking (or implying) that “saving the financial system” did not involve spending a lot of taxpayer money to support the real economy. Remember that if the economy crashes, asset prices fall, and banks’ problems become even more severe.
And try to avoid three further mistakes that are currently common. Continue reading “Way Too Big To Save”