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Too big to fail is _not_ a fallacy. The knock-ons from the failures of Lehman and Bear Stearns were very visible. In Europe, the knock-ons from the failure of K

Too big to fail is _not_ a fallacy. The knock-ons from the failures of Lehman and Bear Stearns were very visible. In Europe, the knock-ons from the failure of Kaupthing and Landsbanki were too, and they only ended up affecting insitutional investors as retail depositors got government protection. AIG failing would have caused an investor panic across banking as a whole due to their position as the leading insurer of investment risk. In the UK, Lloyds TSB and RBS (two of the 'big four' UK banks) both very nearly collapsed; the smaller Northern Rock bank did collapse and had to become 100% government owned. The alternative in each case was depositors having their assets frozen for a long period with only the promise of pennies on the pound a long time later, with a knock-on loss of confidence for the sector, combined with a large compensation bill for the taxpayers. Would you _really_ like to see what that happens when 20% of the banking market suddenly freezes?

ramanujan 15y ago
Yes. Because the alternative -- which we are currently seeing unfold -- is a wave of sovereign default, starting with the PIIGS and ultimately taking out the USD as the world's reserve currency. ...I should add that Northern Rock did not have to be nationalized, nor should taxpayers be obliged to pay any kind of compensation bill. Bankruptcies can and must happen to clean out the dead wood.
- eftpotrm 15y ago
  UK law provides taxpayer backed guarantees to a fixed balance per saver per bank; if NR had been allowed to collapse the UK taxpayer would've been on the hook for that amount. And I agree that bankrupticies must be possible and are a good thing for businesses as a whole; Too Big To Fail explicitly works against this. NR was big enough regioinally that it'd have caused major economic damage to that (already fragile) region had it been allowed to go down.

ramanujan 15y ago

Yes. Because the alternative -- which we are currently seeing unfold -- is a wave of sovereign default, starting with the PIIGS and ultimately taking out the USD as the world's reserve currency. ...I should add that Northern Rock did not have to be nationalized, nor should taxpayers be obliged to pay any kind of compensation bill. Bankruptcies can and must happen to clean out the dead wood.

eftpotrm 15y ago
UK law provides taxpayer backed guarantees to a fixed balance per saver per bank; if NR had been allowed to collapse the UK taxpayer would've been on the hook for that amount. And I agree that bankrupticies must be possible and are a good thing for businesses as a whole; Too Big To Fail explicitly works against this. NR was big enough regioinally that it'd have caused major economic damage to that (already fragile) region had it been allowed to go down.