Tuesday, September 20, 2011

Too Big To Fail, Failed

Following the financial crash in 2008, many politicians garnered significant political goodwill by proclaiming the desire to end the moral hazard implicit in ‘Too Big To Fail’ financial institutions. For example, Obama and the UK Chancellor George Osborne both promised to end the possibility of this returning to haunt the global economy. Unfortunately, nothing has changed. The current Euro zone Sovereign Debt Crisis-with Portugal, Ireland and Greece surely headed for default- is actually a crisis for the banks that bought this debt. The necessity for them to be recapitalized and the concomitant knock-on effects to the global economy are the true worries here.

If they weren’t ‘Too Big To Fail’ then the concerns would be far less. These banks bought this rubbish debt. No one forced them too. Why not just let them face up to the consequences of their actions, in the same way that everyone else does?  However, in this ‘Scared New World’ the key principle seems to be that bond holders must never be punished and, banks must continue to be allowed to game the system whilst hiding behind the ‘greater good’ argument.

So, essentially, it’s the same issue as 2008. In other words, ‘Too Big To Fail’ is still guiding the global economy. Meanwhile, Banking pay and bonuses are going up. Go figure.

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