Last year there were lots of debates about whether to bail out companies that were “too big to fail.” Then this spring the government began developing plans for monitoring companies that were considered “too big to fail” (although by then the preferred term had morphed into “systemically important”).
What does it actually mean for an institution to be “too big to fail” (T.B.T.F.)?
That’s a very tricky question. And of course, you can’t trust any given company’s self-assessment of T.B.T.F.-ness. When a company is in trouble and seeking government help, it will proclaim itself T.B.T.F. But to the extent that being labeled T.B.T.F. subjects a company to more regulation and oversight when times are good, that company will likely excuse itself from the T.B.T.F. category.
So are there some objective, lobby-proof criteria for this designation?
James B. Thomson at the Federal Reserve Bank of Cleveland says yes. In a new report, he takes a stab at outlining the definition of a “systemically important” financial institution (SIFI, for short), and how it might be contained and monitored. His model focuses on five characteristics, with an emphasis on the latter four:
And from those, Mr. Thomson constructs five categories for systemically important institutions, with each ideally subject to a different level or type of scrutiny and regulation.
Here’s a video, put out by the Cleveland Fed, that helps explain this proposal in accessible layman’s terms:
Whatever happened to the Sherman Anti-Trust Act? Is it still being used?
The debate over “too big to fail” is chasing the wrong goal. It’s really about reasoned decisions vs ideology.
We let Lehman fail, now regret it, but only beacuse the results were terrifying. Does it make sense to allow CIT to fail? CIT isn’t large enough to pose a catastrophic failure risk for the general economy. But it can mean crisis for thousands of small to middling commercial borrowers. We can let our imaginations run to a cascading failure of small and medium businesses, in order to build the TBTF case. Why do we need to do that? Isn’t the dislocation of many of America’s middle market companies an event worth avoiding, even if there’s little risk of total catastrophe? Wasn’t CIT management basically reasonable in it’s stewardship? It’s not a question of TBTF, it’s a question of what’s best for eveyone.
Creating a “systemic risk” regulatory protocol doesn’t solve this problem. if anything, it contributes to the greatest systemic risk we face: the financial failure of Federal or local government. The answer already lies within our regulatory structures: what is needed is regulators who won’t turn their back on a failing Lehman because they are concerned with political fallout, or because rescue is at odds with some weird philosophy. I deeply concerned that so many of these decisions were and continue to be made by Treasury, which is a wholly political organ. Far better to relegate these decisions to structures which are more insulated from the political process: FDIC, SEC, the Fed and the SRO’s. This after all, was the idea behind the New Deal reforms. The only problem I see is finding a few good people to fill these roles.
The “Too Big to Fail” concept always begs a simple question: Is the loss of an equal number of key small businesses as damaging as the loss of one key large business?
Oddly enough, no one ever dares to answer that question.
Your Name Required
Your E-mail Required, will not be published
XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
Your CommentComments are moderated and generally will be posted if they are on-topic and not abusive. For more information, please see our Comments FAQ.
Apture allows readers to dig deeper into a subject without ever leaving the blog post. When you click on any link marked by the icons , , or , you will be able to view video, reference materials, images and other related media. Please e-mail your feedback and thoughts on this feature to apture@nyt.com.
David Leonhardt writes the Economic Scene column, which appears in The Times on Wednesdays.
Catherine Rampell is the economics editor at nytimes.com.
R.M. Schneiderman is a Web producer for nytimes.com.
Marc Lacey is The Times's bureau chief for Mexico, Central America and the Caribbean.
Carter Dougherty is a European economic correspondent for The Times and the International Herald Tribune.
Economists offer readers insights about the dismal science.
Economics doesn't have to be complicated. It is the study of our lives "” our jobs, our homes, our families and the little decisions we face every day. Here at Economix, David Leonhardt, Catherine Rampell and other contributors will analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.
Should the government pass another stimulus package? Watch two economists debate the issue, then click here to submit a question.
How the $700 billion Troubled Asset Relief Program is being doled out.
Three economists explain what worked and what didn't.
A map of unemployment rates across the United States, now through January.
Faces, numbers and stories from behind the downturn.
A series about the surge in consumer debt and the lenders who made it possible.
A series exploring the origins of the financial crisis, from Washington to Wall Street.
The Times just launched a new consumer advocate column called The Haggler, and we need your help to get it off the ground "” and to keep it aloft.
In order to view this feature, you must download the latest version of flash player here. var so = new SWFObject('http://graphics8.nytimes.com/packages/flash/business/20081008-credit-charts-graphic/credit3.1.swf','nytSWF',337,385,9,'#FFFFFF'); so.addParam('allowScriptAccess','always'); so.addParam('allowFullScreen','true'); so.addParam('BASE','http://graphics8.nytimes.com/packages/flash/business/20081008-credit-charts-graphic/'); so.addVariable('allowCaching',true); so.write('embed70'); #embed70{visibility:visible !important;}h2.multiHeadline {font-size:156% !important;padding:0px 0px 7px !important;margin:6px 6px 11px 3px !important;border-bottom:1px solid #CCCCCC !important;}
In order to view this feature, you must download the latest version of flash player here. fl = new Object(); fl.id = '667'; fl.swf = 'http://graphics8.nytimes.com/packages/flash/business/HOUSING_PRICES_GRAPHICS/housing337.swf'; fl.base = 'http://graphics8.nytimes.com/packages/flash/business/HOUSING_PRICES_GRAPHICS/'; fl.width = '337'; fl.height = '300'; fl.as = '3'; fl.domain = 'www'; fl.caching = 'true'; fl.vars = []; writeNYTFlash(fl); #embed667{visibility:visible !important;} Archive Select Month August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 Feeds Economix RSS Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top Copyright 2009 The New York Times Company Privacy Policy Search Corrections RSS First Look Help Contact Us Work for Us Media Kit Site Map function apture_onload() { apture.addCallback(apture.WINDOW_OPEN, function() { dcsMultiTrack('DCS.dcssip','www.nytimes.com','DCS.dcsuri','/blogs/Apture.html','WT.ti','Apture','WT.z_dcsm','1'); }); } if (typeof NYTD.Blogs.user != 'undefined') { if(NYTD.Blogs.user.isLoggedIn()) { var dcsvid=NYTD.Blogs.user.getId(); var regstatus="registered"; } else { var dcsvid=""; var regstatus="non-registered"; } } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); var pageTracker = _gat._getTracker("UA-4406282-67"); pageTracker._initData(); pageTracker._trackPageview(); if((document.referrer).indexOf(document.location.hostname) == -1) { var referrer = document.referrer; } else { var referrer = ''; } document.write(''); Read Full Article »