The real issue for too big to fail is: by how much does the prospect of government support lower spreads compared to what they would otherwise be. The Goldman report acknowledges that too big to fail exists and distorts the market, but conveniently ignores the question of how big this distortion is really – and how it threatens to again bring down the economy.The Baseline Scenario
Goldman Sachs Concedes Existence Of Too Big To Fail
Simon Johnson | Former chief economist of the International Monetary Fund, professor at the MIT Sloan School of Management, senior fellow at the Peterson Institute for International Economics, and member of the CBO’s Panel of Economic Advisers.
TBTF firms in any industry have an enormous competitive advantage over other firms in that industry. If a firm is too big to fail, it is too big to exist as a private enterprise. The public must either break it up break it up or convert it to public ownership.
ReplyDeleteCapitalism leads to monopoly and oligopoly and the economic advantage to extract rent that this afford.
ReplyDeleteThe idea of price determination by supply and demand equilibrating in competitive markets free of govt intrusion is a myth. It the absence of regulation, market become imperfect through differences in power.
Banks (large or small) only fail because they are allowed to make a fraudulent promise to depositors: “you deposit $X, we promise to return $X, meanwhile we invest or lend on the $X in a less than 100% safe manner, which means that from time to time we CAN’T repay the $X.”
ReplyDeleteIf depositors who want their money used in the least bit risky fashion had to carry the downside loss as well as grabbing the upside profit, there wouldn’t be a problem.