Too Big To Fail
By Gary H. Stern and Ron J. Feldman
Foreword by Paul A. Volcker
The past few breathtaking weeks have produced federal intervention in the U.S. economy at levels not seen since the Great Depression. This turmoil has raised anew the debate over moral hazard and the questions of if and when the government should use public funds to shore up failing financial institutions. Freddie Mac, Fannie Mae, AIG—where will it end? And, for that matter, why them and not Lehman Brothers?
The Too Big to Fail [TBTF] concept was presciently detailed in Too Big to Fail: The Hazards of Bank Bailouts, a book published in 2004 by the Brookings Institution Press. Authors Gary Stern and Ron Feldman, then of the Federal Reserve Bank of Minneapolis, maintained that too little had been done to reduce creditors’ expectations of TBTF protection. It is largely a problem of moral hazard, in which the anticipation of a safety net reduces a creditor’s or a bank’s incentive to act prudently, with unfortunate net costs to the nation’s economy. The financial institutions take government intervention for granted. As policymakers alternately attack Wall Street and feed it billions from public coffers, the public need to familiarize themselves with the larger picture. Reading Too Big to Fail would be a helpful step in that direction.
“This is a valuable and comprehensive treatise on TBTF a critically important policy issue that needs to be addressed well before banking or financial crisis occurs. Policymakers, regulators, government officials, legislators, and private financial companies should read and heed the authors’ analysis and recommendations.” RICHARD M. KOVACEVICH, former Chairman, Wells Fargo