Too big to fail

The head of the Dallas Fed lays out a persuasive case for why it has to stop:

Rosenblum lists many reasons why he thinks the TBTF banks must be broken up, but the one that might be the most damning is his criticism of the Dodd-Frank financial reform bill, which ostensibly created a mechanism for winding down troubled TBTF institutions with reduced cost to the taxpayer. Under Dodd-Frank, banks are supposed to create “living wills” that contain plans for orderly wind-downs in the case of a Lehmanesque disaster.

But in his criticism of Dodd-Frank, Rosenbaum points to what Josh Rosner in our recent Bank of America piece called “the worst-kept secret on Wall Street”: the high probability that when “the big one” finally hits, no one in government will have the guts to let a TBTF company go down the drain. Why? Because these firms are so deeply intertwined and interconnected that when one of them starts taking water, they essentially all do — and so any president who chooses to refuse to reach into the cookie jar for a big bailout would likely be signing off on the political suicide of a broad systemic collapse.

“In all likelihood,” Rosenbaum writes, “TBTF could again become TMTF – too many to fail, as happened in 2008.” He adds that, “For all its bluster, Dodd-Frank leaves TBTF entrenched.”

The significance of the Dallas Fed report isn’t that yet another person has come out to make public note of the impossible-to-miss, gigantic, oozing wart on the face of American capitalism that is the TBTF system. What’s significant is that we’re moving closer to a time when the extremely critical view of TBTF, and the demand for an end to the system, becomes bipartisan consensus.

2 thoughts on “Too big to fail

  1. First of all the president….no president….can “reach into the cookie jar” for a big bailout. Congress writes the laws authorizing the spending of money including bailouts. The president can sign the law or veto the law. If he/she veto’s the law, Congress can override that veto. If anything is to change in this country the Congress must be changed. That process can begin in November by voting every Republican out of office. In 2014 we can get rid of every Democrat if need be.

  2. Imhotep makes the central point; Congress must appropriate. Too big to fail has become political poison. If the next failure comes on within the remotest memory of 2008, you will not find a majority of the House or Senate willing to commit political suicide by bail out. We will surely find out whether the last largesse was necessary because come the next the chips are going to fall. The true test of TBTF will be whether when we Lehman the next collapse (my bet is still BoA)the economy craters behind it.

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