An excellent article by Simon Johnson professor at MITs Sloan School of Management, has been plublished today on Bloomberg.
Johnson restates the view that "the very effectiveness of US Treasury actions and statements in late 2008 and early 2009 had undeniable side effects, by effectively guaranteeing these institutions against failure, they encouraged future high-risk behaviour by insulating the risk-takers who had profited so greatly in the run-up to the crisis from the cosequences of failure. And this encouragement isn't abstract or hard to quantify. It gives an unwarranted competitive advantage, in the form of enhanced credit ratings and access to cheaper capital and credit, to institutions percieved by the market as having an implicit Government guarantee."
The most interesting point of this article is that the Dodd-Frank financial-reform legislation was supposed to end too big to fail in some meaningful sense. But what has changed? Johnson says:
"at the end of the third quarter of 2010, by my calculation, the assets of our largest six bank holding companies were valued at about 64% of gross domestic product - compared with about 56% before the crisis and about 15% in 1995."
"Our largest banks are now bigger, in dollar terms, relative to the financial system, and relative to the economy, than they were before 2008. So how does that make it easier to let them fail?"
For the full article click on this link: http://www.bloomberg.com/news/2011-01-27/banking-toxic-cocktail-is-too-big-to-forget-commentary-by-simon-johnson.html
