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I agree that too big to fail is an unacceptable piece of public "policy". If shareholders, bondholders & counterparties can't be taken to 0 without collapsing a
by netcan 13y ago
I agree that too big to fail is an unacceptable piece of public "policy". If shareholders, bondholders & counterparties can't be taken to 0 without collapsing an economy, we have a dangerous moral hazard.
But I think that assymetric risk and moral hazard is just a reality of the world sometimes. It can't be completely eliminated.
- analog31 13y agoI've seen "too big to fail" apply to projects within businesses as well.
- mathattack 13y agoYes. Sometimes people forget than money already spent is a sunk cost. This is endemic in IT projects. "We have to get this in, we've already spent $20 million, and they'll fire us if we have nothing to show for it." Famous last words...
- mathattack 13y agoThey can't be eliminated completely, but it can be reduced. Think of the Lemon problem with cars. [1] The seller has a lot more information than the buyer. The buyer can never know as much as the buyer on what's wrong. In theory it becomes impossible to sell good cars because of the lemons. One way to solve this is to have laws where you can go back to the seller. Another way is to have a 3rd party provide a warranty. Similarly in Financial Markets, you can reduce the moral hazard with smart design. You'll still have some residual, but such is the nature of human interactions. [1] http://en.wikipedia.org/wiki/The_Market_for_Lemons http://en.wikipedia.org/wiki/The_Market_for_Lemons