1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.I find it interesting that so many commenters on the banking mess are saying the same things about the bailout. The pollution of the political process by banks, bankers, financiers, and fellow travelers is just plain wrong.
Update: Simon Johnson discusses turnaround scenarios here. Among his observations, this one stood out for me:
To me, fixing the banks - i.e., greatly reducing their economic and political power - is essential for all our futures, irrespective of when and how the economy recovers. We cannot allow the same kind of potentially system-breaking risks to be taken again, and we cannot assume that the solutions that failed in the past (e.g., tweaking regulatory powers) will work in the future. Next time, the banks won’t just be Too Big To Fail, they’ll be Too Big To Rescue - the fiscal costs if we let this happen again would likely be huge; where is it written that the U.S. will for all time have fiscal credibility and provide the world’s leading reserve currency?It's come to this: Too Big To Fail is Too Big To Exist.
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