By Arnold Kling
this post is linked to a petition asking the Financial Crisis Inquiry Commission and the Treasury Secretary to explain in detail their reasons for recommending, or not, a system that relies on a highly concentrated, limited number of interlinked financial entities who are clearly “too big to fail,” and who mix activities that are vital to the health of the nation with high risk activities that are frequently described as a casino.
Pointer from, of course, Mark Thoma.
I agree with Judson that the heart of the problem is large, complex financial institutions gambling with taxpayer money. I agree that what I describe as the strategy to “regulate the heck out of those institutions” is not a promising approach. My mantra is that we need to make failure a credible and viable option for any private firm. At some level, that requires unbundling critical systemic functions, like check processing, from risky betting functions, like taking interest-rate risk or credit risk. Whether that requires creating separate corporate entities or making a cleaner separation within firms is not clear. In any case, it is a misnomer to describe this risk separation as “Glass-Steagall 2.0” Glass-Steagall was mostly about avoiding concentration of power in financial institutions–it never succeeded in creating a neat separation of risk (nor was that the intention).