Tuesday, October 27, 2009

Government Failure: Institutionalizing Bailouts

John Taylor explains in this post how the administration is trying to transform its bailouts of large financial institutions (its "too big to fail" doctrine) into a permanent feature of the American financial regulatory framework:
Fears of potential damage from the failure of a large financial institution has created a bailout mentality in which the U.S. government has committed many billions of dollars, intervened in the operations of scores of private firms, and caused excessive risk-taking. A new policy is needed. Two proposals were considered in testimony at the House Judiciary Committee a few days ago. Michael Barr of the U.S. Treasury and David Moss of Harvard supported a proposal to create an FDIC-like resolution regime for any financial firm viewed as too big or complex to fail. Testimony by David Skeel of Penn and me criticized that approach as institutionalizing the bailout process seen during the crisis and supported alternatives in which the failing financial firm would go through a bankruptcy process designed to deal with financial firms.

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