Thursday, January 27, 2011

Bigger than "too big to fail."

At the time, the perverse incentives created by bailouts were well understood.
...the very effectiveness of Treasury actions and statements in late 2008 and early 2009 had undeniable side effects, “by effectively guaranteeing these institutions against failure, they encouraged future high-risk behavior by insulating the risk-takers who had profited so greatly in the run-up to the crisis from the consequences of failure.”

And this encouragement isn’t abstract or hard to quantify. It gives “an unwarranted competitive advantage, in the form of enhanced credit ratings and access to cheaper capital and credit, to institutions perceived by the market as having an implicit Government guarantee.”
Now, they are even worse.  By virtue of their competitive advantage, the big banks have grown even bigger:
 the assets of our largest six bank holding companies were valued at about 64 percent of gross domestic product -- compared with about 56 percent before the crisis and about 15 percent in 1995. 

1 comment:

  1. Heh... to bigger to fail.
    You know, the libertarians (and incidentally the Austrians) warned that exactly this would happen.