USA Today: Replace institutions that are too-big-too-fail with ones that are too-small-to-bail
If there’s anything economists, business leaders and politicians of all stripes agree on, it’s that massive financial institutions pose a serious threat to the global economy. These institutions have long been thought of as “too big to fail.” But it wasn’t until last fall, when government regulators let Lehman Bros. go belly up, that they realized it was quite literally true.
Within hours of Lehman’s bankruptcy filing, credit markets around the world locked up, other institutions began to crumple, a prominent money-market fund faltered and the economy was poised for a catastrophic freefall. With little choice, regulators stepped in to prop up AIG and push a larger bank bailout through Congress.
Those actions quelled panic and might have averted a depression, but they have left the “too big” problem even worse than before. As long as large banks know that government will rescue them, they will take imprudent risks.
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