We hear a lot about ‘too big to fail’ and how future regulation should be designed, at least in the financial sector, to prevent growth to that size. Apparently, Treasury Secretary Geithner hasn’t heard about this:
Even worse is Geithner’s notion of designating certain banks as too big to fail and then subjecting them to more stringent capital requirements and a special tax that would be used to pay for the occasional government bailout. In practice, that approach is likely to create a competitive imbalance between the biggest banks and everyone else, while inviting the giants to find clever ways to take on extra risk, knowing that the government will always be there to bail them out. Creating two classes of institutions with different rules and different regulators would also invite the kind of regulatory arbitrage and games-playing at which Wall Street excels.
There probably are businesses where ‘too big to fail’ is the only consistent way to turn a profit, such as the auto industry. There are advantages of scale, as well as ubiquitous of suppliers, that almost require the to big to fail scale (’boutique’ car companies that aim for niches and have limited models probably don’t need to get to this size). After all Honda, Toyota, and Nissan are also probably too big to fail also: they simply haven’t failed.
But I can think of no reason why there would be economies of scale for banks and investment firms–I haven’t heard any reason why a $50 billion loan portfolio is inferior to a $1 trillion loan portfolio. Unless, of course, you simply can’t conceive of a world with a smaller banking sector less invested in Big Shitpile….
Impeach Geithner. Impeach him now.