The Danger Posed By The Too-Big-To-Fails via MortgageOrb

By Richard W. Fisher on Friday 13 January 2012 Just as health authorities in the U.S. are waging a campaign against the plague of obesity, banking regulators must do the same with regard to oversized banks that undermine the nation’s financial health and are a potential threat to economic stability.

Aspiring politicians do not have to be part of the Occupy Wall Street movement or be advocates for the Tea Party to recognize that government-assisted bailouts of reckless financial institutions are sociologically and politically offensive; they stand the concept of American social justice on its head.

Business school students will understand that bailouts of errant banks are questionable from the standpoint of the efficient workings of capitalism, for they run the risk of institutionalizing a practice that distorts the discipline of the marketplace and interferes with the transmission of monetary policy.

I argue that sustaining too-big-to-fail-ism and maintaining the cocoon of protection of the "systemically important financial institutions" (SIFIs) is counterproductive, expensive and socially questionable. Financial booms and busts are a recurring theme throughout history, and bankers and their regulators suffer from recurring amnesia. They periodically forget the past and all the lessons of history, tuck into some new financial, quick-profit fantasy - like the slicing and dicing and packaging of mortgage financing - and underestimate the risk of growing into unmanageable and unsustainable size, scale and complexity as they overindulge in that new financial fantasy.

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