Too big too fail: The hazard of bank bailouts was written in 2004 by the President/CEO and vice president of the Federal Reserve Bank of Minneapolis. The authors recommended that policymakers enact a series of reforms to reduce expectations of bailouts when large banks fail.
The need for reform and clarity is evident and urgent. (Paul A. Volcker, Foreword)
Who saw the banking crisis in advance? It was obvious to the authors that it was on the horizon:
Too big too fail is real, costly, and becoming more severe. The second part of the book provides policy makers with options to address it. TBTF is not unsolveable, and this is the right time to address the problem – waiting for the next bank crisis can hardly improve our lot. (pg xii, Preface)
Penalize policy makers: (pg 142) <President Obama are you listening?>
For example, policy makers who do not close banks while still solvent must forfeit their jobs.
Warning signs that a banking problem might have been underway: (pg 181)
CDOs went from roughly $8 billion at end of 1998 to $500 billion at the end of 2001.
Issuance of loans in the so-called asset backed securities market – securely backed by consumer loans or smaller business loans – had risen fourfold, from roughly $300 billion to $1.2 trillion between 1995 and 2001.
Now that TBTF has been proven false, government officials who didnt act prudently must lose their jobs (in some cultures a lot worse would befall them), and where warranted, if their influence was bought, mandatory prison terms should be handed-out in order to restore public confidence. If executives and companies continue to improperly benefit from the “crisis” why should I believe in the system? Its amazing that when the first proposal was issued for the bailout in September the government officials spoke of the urgency to act by claiming that within a week the economy would completely crumble, confidently pushing a crummy bailout package for the privileged, not the people, but where were those government officials when it came time to confidently act before the banking crisis? They didnt see it coming and yet they were so quick to offer the solution! So, how could their “expertise” be relied on?