Too Big To Fail

NPR just published the results of a survey of "experts" about what Obama's financial reform will do to curb too big to fail.

Everyone thinks the reforms just aren't enough to solve the problem.

Take, for example, "too big to fail" -- the idea that if one of the largest banks in the country gets into trouble, the government will save it with taxpayer money.

"A vote for reform is a vote to put a stop to taxpayer-funded bailouts," Obama said in his speech in New York on Thursday.

I cannot find any experts -- of any party -- who are willing to agree with Obama on this one.

"We're not seeing a very forceful step on the too-big-to-fail problem," said Carmen Reinhart, an economist at the University of Maryland. "If there's any doubt that the crisis may be systemic, we will bail out again."

Here's what I see. The reality is this. By bailing out the banks in 2008, we have created too big to fail as a near certainty. That's because bailing them out told all banks of that size that they are to vital to fail and the government will back them if they do fail. The banks have been told that their industry is not like others.

So, this problem will not be solved with band aids. Simply creating a slew of new bureaucracies and rules will do little. That's because their size and structure will remain the same. They will still be potentially too big to fail.

That's why there's a push in several circles to break up the banks. That would provide the sort of change that will force them to no longer be too big to fail. The reality is that this is a complicated problem with complicated solutions. Yet, both sides have engaged in sloganeering and platitudes. Those aren't answers to too big to fail. As such, financial reform will ultimately fail. As long as Citigroup has tentacles in insurance, investment, mortgages, and insurance with assets that near a trillion dollars, it will continue to be too big to fail. No one has proposed an idea to stop that. Too big to fail will not be solved until it is addressed.