I've recently heard a lot in the news about financial institutions that are "too big to fail." This has been the justification for adding substantial amounts to the national debt to guarantee the stability of companies whose failure could have ramifications for the wider economy.
What puzzles me about this argument is that the solutions do not match the justification. What the U.S. treasury department--and international agencies--is doing is to create much larger financial institutions. Two "solutions" have been to lend government money to companies so they can continue to grow, and to sell off all or part of failing firms to even bigger ones. Both of these simply create bigger and bigger banks. If there was a danger to the economy before from the failure of large institutions, it seems we have created an even bigger threat with ever-bigger enterprises.
The behemoth banks still hold the bad debts and shaky financial instruments of the smaller firms they acquired. They have gained their assets as well. But, if the assets were inadequate to capitalize the debt for the failed firms, it strikes me that the acquisition has only served to dilute the capital ratios for the acquiring company.
Instead of a larger number of shaky firms that could fail and spread instability throughout the economy, we have a smaller number of ever bigger institutions with larger and larger balance sheets of dubious debt. If the failure of one of the smaller banks could imperil the economy, what could problems at one of these few remaining huge institutions do? And, by persuading them to take on more and more bad debt, are we only increasing the likelihood of such a problem?
I'm not an economist. I'm a woman who has worked my whole life, managed family finances, and owned a couple of small businesses. Whatever economic knowledge I have is strictly experience and street sense--most of acquired by costly trial and error. But it strikes me that a little street sense is in order here. And I don't mean Wall Street. There, bigger is always better.
On the street where I live and work, I wonder if that is really true.
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