Reminder: Technically, Too Big To Fail Is Not Actually A Thing
May 31, 2012 10 Comments
Despite its almost comically hypermelodramatic title, there’s little to argue with in Simon Johnson’s post Jamie Dimon And The Fall Of Nations at Baseline Scenario. Little, that is, if you let this slide:
This bank [JP Morgan] is “too big to fail” – meaning that if it were to get into difficulties, substantial financial support would be provided by the Federal Reserve System (and perhaps other parts of government) to prevent it from collapsing.
This is stated so matter-of-factly it’s possible to gloss over it as you’re reading without quite stopping to ask…well, I mean…Huh?
Here’s the thing. I looked in my pocket copy of the U.S. Constitution for the section on “too big to fail”. Didn’t find it. Curious, I went over to the Stanford campus and borrowed Finance Professor Anat Admati’s textbook on introduction to banking. Turning to the index, I looked for Too big to fail and Fail, Too big to. Not there. The plot thickened.
When did we all agree that “too big to fail” was an objective thing that we weren’t going to argue with any longer? I’m still here. I’m still arguing.
JP Morgan is a company. There is a thing that can happen to companies when they can’t pay their bills for whatever reason, which is that they can declare bankruptcy. I am sorry, but that is the established process. If you are arguing for some other process, there is no legal basis for it, so you’re the one with the burden of proof, not me. Fuck this too big to fail bullshit already. I’ll see your too big to fail and raise you one chapter 11.
In fact this is something both left and right should (supposedly) agree on right? We’re all mad about the bailouts aren’t we? Isn’t the consequence of being mad about bailouts supposed to be, fuck bailouts? How did things get so convoluted that when everyone got mad about bailouts we proceeded directly to assuming bailouts were business as usual unchangeable facts of life?
And the thing is, if you take away this “too big to fail” nonsense, the rest of Simon Johnson’s article basically becomes moot. Try it at home. No too big to fail, no perverse asymmetric banker incentives to lead to Our Nation’s Fall. Done. Problem solved.
Now I know what you’re going to say, you’re going to say that I’m being dumb/naive because ‘realistically’, under the current political-economy context we have in place, Congress is very very very likely to treat certain banks as “too big to fail”, JP Morgan among them. Fair enough. So, we can both agree we have a problem on our hands, which is, and let me try to state the problem fully not partially, When (a) [certain stuff e.g. a bank blowup] happens, (b) Congress will [bailout/other stuff that treats a bank as "too big to fail"], (c) costing us money and probably also leading to the ill effects/incentives Simon Johnson talks about.
But let’s not forget that solutions to this problem (and avoiding (c)) can involve addressing/preventing (a), as most of conventional wisdom seems to be trying to do (futilely, IMHO), or they can involve addressing (b). All I am saying here is, give (b) a chance. It’s not like anyone’s making me super confident they have a good solution to (a) after all.