We hear a lot about regulating the banking system and getting away from the “Too Big to Fail” problem. In this excellent op-ed Chris Berg tells it how it is:
… no matter what the Murray Inquiry recommends – no matter what policy the Government or Reserve Bank or Australian Prudential Regulatory Authority imposes today – the decision of which firms to bail out and which to let fall will be made by the policymakers of the future, according to their own whims, and mindful of political, not economic, considerations.
Simply put, there are no ways to credibly constrain future governments from deeming an institution too big to fail.
Too big to fail is a political issue not an economic issue. Economically there is no institution too big or too important to fail. Rather in the heat of a crisis – and there will always be a crisis – politicians will make a decision to deploy taxpayer funds to various purposes to “alleviate” the extent of the crisis. One such purpose will be to bail out financial institutions.