Over at Cafe Hayek they compare the bank bailouts to paying a ransom. I like to compare this to the situation in Israel. If Israel gave into all the hostage situations and all of the medias demands we would see the situation flare up 1,000X what it currently is. Every terrorist or activist with an agenda would take advantage of a government policy to “bail out” or pay ransom for hostages.
A big problem when the financial crisis hit was that regulators did not have the authority to force financial institutions in the shadow banking system into the type of resolution process the FDIC uses for banks in the traditional banking system. This solves that problem, and this is an important change.
On the most important issue of “too big to fail,” the legislation does exactly the wrong thing. It gives regulators discretion to use resolution authority to break up at-risk institutions. But the regulators already had that. What they need are hard and fast rules that require them to use resolution authority under well-specified conditions. On a case-by-case basis, it is always is safer to do a bailout, just as on a case-by-case basis it always seems easier to just pay ransom to the kidnapper. Resolution authority that is discretionary is resolution authority that will never be used. And the big banks know it.
They both can’t be right. When I read Thoma I think of the Shel Silverstein poem,Woulda-Coulda-Shoulda:
All the woulda-coulda-shouldas
Layin’ in the sun,
Talkin’ ‘bout the things
They woulda-coulda-shouldas done …
But those woulda-coulda-shouldas
All ran away and hid
From one little did.
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