Too Big to Fail?: Recasting the Financial Safety Net
THE PANIC OF 2008: CAUSES, CONSEQUENCES AND IMPLICATIONS FOR REFORM, p. 94, Lawrence E. Mitchell & Arthur E. Wilmarth, Jr., eds., Edward Elgar, 2010
24 Pages Posted: 4 Mar 2009 Last revised: 28 Dec 2014
Date Written: 2010
Government safety nets in the United States and abroad focus, anachronistically, on problems of banks and other financial institutions, largely ignoring financial markets which have become major credit sources for consumers and companies. Besides failing to protect these markets, this narrow focus encourages morally hazardous behavior by large institutions, like AIG and Citigroup, that are "too big to fail." This paper examines how a safety net should be recast to protect financial markets and also explains why that safety net would mitigate moral hazard and help resolve the too-big-to-fail dilemma.
Keywords: financial markets, subprime, financial crisis
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