In the discussion about banks that are “too big to fail,” I think you start with two observations:
1.) In general, competition and the discipline of failure are better, smarter regulators than government bureaucrats. That doesn’t mean government regulation is unnecessary; it does mean that regulators should be empowered to do only what the market cannot or will not do.
2.) Banks that are “too big to fail” are largely immune to the discipline of failure and to the rigors of competition.
That in turn leaves you with two basic solutions: You can greatly expand the gov’t regulation applied to the “2 Big 2 Fail,” or you can reduce and limit the size of those institutions and by doing so reintroduce the spectre of failure to the system.
There’s a move afoot in Congress to take the second approach, and I hope they have the guts to carry it out.
From the Los Angeles Times:
Angered by bailouts that have kept corporate titans such as American International Group Inc. afloat, members of a key House committee last week voted to give the government vast new power to downsize private companies, something that happens now only in the most egregious antitrust cases.
Instead of helping cushion the fall of Wall Street powerhouses through government aid or variations on traditional bankruptcy, there is growing momentum in Congress to cut those firms down to size before they start teetering to limit the damage if they do collapse.
“The era of the big bank is over,” said Simon Johnson, an MIT professor and former chief economist at the International Monetary Fund.