Friday, December 18, 2009
My view is that we should not allow any bank that is too big to fail. That suggests breaking up the existing big banks. The harder question is what one does about a smaller bank that grows. We should not allow banks to merge into banks that are larger than the limit, but when they just grow through successful business, that is a harder matter. (Perhaps, one would just require that they have larger, perhaps much larger, capital requirements as they grow.)
Update: A commentator argues that we should instead just eliminate taxpayer rescue of banks. I would agree that this would be the best result (see Arnold Kling's post I linked to), but I just don't think our political system would allow it. Given that, eliminating all of the "too big to fail" banks is actually the way to get rid of taxpayer rescue.