Paul Krugman is surely right about this:
I think of the pursuit of a world in which everyone is small enough to fail as the pursuit of a golden age that never was. Regulate and supervise, then rescue if necessary.
There will always be too-big-to-fail banks, no matter where the current debate leads us. When I say that banks’ balance sheets should be capped at $300 billion, I’m not for a minute saying that $300 billion is small enough to fail; I’m just saying that such banks are small enough to rescue. Too big to fail we can cope with, by rescuing banks rather than letting them fail. Too big to rescue we can’t cope with. And right now, the big four banks in the US are too big to rescue. Which is scary.
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Krugman is half right. There has never been a golden age of banking. Banks have always been trouble.
That doesn’t mean that reform shouldn’t be persued, however.
- Posted by MaxProf. Krugman seems to be looking at it solely from an economics standpoint. I think that overlooks issues like regulatory capture and too much political influence (what Simon Johnson calls the banking oligarchy).
- Posted by Argel