Financial Crisis: How We Got in, How to Get Out
A formula is emerging from this economic crisis. If a corporation succeeds, through market expansion or acquisition of complementary or competing businesses, it becomes "too big to fail," thereby achieving every free-market advocate's dream of paradise. The taxpayers, aka the U.S. government, underwrite the risk, and the corporation banks the profits.
Simple, right? Why did it take so long to figure this out?
The March 26 front-page story "Geithner to Propose Vast Expansion of U.S. Oversight of Financial System" said that Treasury Secretary Timothy F. Geithner's proposal would mean "breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit."
In fact, banks have been subject to strict, risk-based capital requirements. It was these very capital requirements, which favored triple-A-rated securities, that produced the boom in the creation of structured products backed by subprime mortgages.
Risk-based capital requirements were a response to the savings and loan crisis of the 1980s, and regulators were confident that with those requirements in place, we would not see a repeat. As we watch Mr. Geithner's plan make its way through Congress, we should be wary that it, too, will seem like the correct response to the present crisis while laying the basis for the next one.
The writer is a member of Mercatus Center's Financial Markets Working Group at George Mason University.