Enlightened Despot Feature: Yglesias Being Wrong
November 25th, 2008 by frederickiiYglesias asks why banks that are too big to fail are allowed to exist. He suggests that no bank be allowed to grow too big to fail:
As a tradeoff, banks that rested in the small-enough-to-fail category could be allowed to operate with much, much laxer oversight and regulation since everyone would understand that if they fail they’re going to sink. Presumably, there are some efficiency gains associated with the economies of scale involved in big financial institutions. But there would also be efficiency gains associated with relaxing the regulations on financial institutions. And the only reasonable way to seriously relax those regulations would be to commit to a no-bailouts scenario. But to do that, we need to make sure the banks aren’t too big to fail. So why not focus the regulatory effort on that — on making sure that institutions don’t get so big that they need bailing out?
Answer: because you can’t put a hard cap on growth. At least, not in America. It’s both a terrible idea - imagine the unintended consequences and weird corporate behaviors as banks approached the size limit - and unmarketable. You might as well try to limit personal success as part of your big new anti-jealousy initiative.
