Posted on Monday, April 4, 2011
Big banks may be too big to save, writes Simon Johnson: "People sometimes talk about “systemic risk” as if it were intrinsic to the financial system. But modern financial history, including in emerging markets, strongly indicates otherwise. When banks and other financial institutions get into trouble, private losses are transferred - explicitly or implicitly - to the government’s balance sheet. Dangerous financial systems pose big fiscal risks...America’s too-big-to-fail banks are well on their way to becoming too big to save. That point will be reached when saving the big banks, protecting their creditors, and stabilizing the economy plunges the US government so deeply into debt that its solvency is called into question, interest rates rise sharply, and a fiscal crisis erupts. In other words, the 'doom loop' isn’t really a loop at all. It does end eventually, as it has - just for starters - in Iceland, Ireland, and Greece."
Ezra Klein's Wonkbook