[mikedouglas]

If you think the extent of AIGs insurance business was 10 companies, you're hugely mistaken. AIG is the backer of a huge number of corporate, state and municipal bonds. The usual terms of those bonds state that if the insurer fails, the bond becomes due right away. In a single day, we'd see a huge percentage of the solvent/proper economy just evaporate.

AIG would take an enormous part of both the private and public economy with it, if it ever failed.

[gnaritas]

I like the idea that if a company is too big to be allowed to fail, then it's to big to be allowed to exist. After we recover, possibly if, companies like AIG that are single points of failure need to be broken up.

I don't know if this is practical or not, but what if future regulation were aimed at limiting the total size/amount of money/whatever that a company is allowed to own with the goal of keeping risk distributed enough so that we wouldn't fear letting bad companies fail?

They'd also have to monitor board membership and stock ownership to ensure you didn't end up with hundreds of companies being virtually one giant company behind the scenes all following the same bad policies.

I'd imagine this isn't all that dissimilar to dealing with monopolies. Too little competition is bad and now we've learned that allowing any single point of failure is just as bad.

As all hackers know, single points of failure are risky, even if a crash is unlikely. Our economies load needs to be better distributed.

[jacoblyles]

>"I don't know if this is practical or not, but what if future regulation were aimed at limiting the total size/amount of money/whatever that a company is allowed to own with the goal of keeping risk distributed enough so that we wouldn't fear letting bad companies fail?"

Interestingly, during the Great Depression there existed laws which limited the number of branches that banks could have. Politicians preferred to keep banks small, fearing the power of larger banks. You see, anti-capitalism and a populist distaste for financiers are nothing new.

Perhaps surprisingly, states that forced banks to be small were the hardest hit by bank failures in the Depression. The tiny, unthreatening banks did not have the margin of error to wait out the financial chaos. Meanwhile, places like Canada that allowed large national banking conglomerates avoided bank failures almost entirely.

Our recent crisis was very different from the Great Depression. Contrary to the 1930s, scale was often a vulnerability, and not an asset. However, the example of the Great Depression ought to drive home to us the danger of optimizing to the last crisis, lest we precipitate a new one in our rashness.

There is also danger in drawing simple, neat lessons from a messy crisis. Scale was not always our enemy. We must remember that several private firms were bailed out, not by public dollars, but by private acquirers. Wachovia's sale to Wells Fargo would have been legal under many of the world's regulatory regimes, and it was legal in the 2008 United States, but it would not have been legal in the 1998 United States when we still had anti-scale laws on the books. If those regulations were still in place, at least a few more large firms would have been at the government's door, hat in hand.

Populism is politically fruitful, but it can wreak havoc on an economy, and it is almost never thoughtful or well-informed. We ought to pause before giving in to its mellifluous rhetoric.

[gnaritas]

> You see, anti-capitalism and a populist distaste for financiers are nothing new.

No surprise, financiers ripping us is nothing new either.

> The tiny, unthreatening banks did not have the margin of error to wait out the financial chaos. Meanwhile, places like Canada that allowed large national banking conglomerates avoided bank failures almost entirely.

Perhaps they didn't set the right limits, kept them too small. Because we failed to get it right once doesn't mean we should stop trying and just accept being ripped off as a cost of doing business.

Either we figure out how to regulate the market such that this won't happen in the future or we nationalize the banking industry like others have done and admit that the only thing that's really to big to fail is the government.

> There is also danger in drawing simple, neat lessons from a messy crisis.

That, I agree with. But our current system has clearly failed, something needs to be done, time for another experiment.

> We ought to pause before giving in to its mellifluous rhetoric.

Talking about possible solutions on a website is pausing, it's not like we're implementing policy here or anything. It's just an interesting things to speculate about.

[jacoblyles]

>"No surprise, financiers ripping us is nothing new either."

Is this what you really think about finance?

If I were to weigh the good and the bad that finance has done for the human species, I have little doubt to which side the scale would tilt. Finance is an essential part of an advanced economy, and advanced economies are much more fun to live in than the other kind.

Populism is driven by basic, tribal emotions and explanations that appeal to the lowest common denominator. Humans fear that which is complex and hard to understand. They are envious creatures with a poor natural grasp of economics. They reason that if the goldsmith is getting richer, why, then I must be getting poorer!

Populism hasn't really progressed since the days of goldsmith banking. That's not what it is built to do.

I don't think populism is the wisest way to modify the banking system, but sadly we have decided that voting is the best method to make such decisions. Since populism is simple and appeals to the gut instinct, it wins out in votes. So populism is what we get.

> "Because we failed to get it right once doesn't mean we should stop trying"

The first failure caused immense human suffering. What we have now needs some tinkering, but it is immensely better. It would be foolish to make large, rash actions to experiment recklessly when the costs are so high. Speaking of which:

>"or we nationalize the banking industry like others have done and admit that the only thing that's really to big to fail is the government."

I can think of three nations off the top of my head that nationalized banks. One was temporary (Sweden). The other two had immense problems with bad debt in good times (Japan and China, if I recall correctly). It turns out that the profit motive does help banks make good loans.

> "But our current system has clearly failed, something needs to be done, time for another experiment."

Our system has produced the most prosperous society in the history of the world. It did a bad job reacting to a novel circumstance. It needs to be patched, not scrapped.

>"Talking about possible solutions on a website is pausing, it's not like we're implementing policy here or anything. It's just an interesting things to speculate about."

There are a few places where temperate, informed discussion of these issues take place. None of them has little voting arrows to click on next to the content, nor do they exchange information in short soundbites.

[gnaritas]

> Is this what you really think about finance?

All of finance, of course not, I was talking about the bad ones, the criminals.

> What we have now needs some tinkering, but it is immensely better.

You'll note, I was discussing tinkering. When I say our system has failed, I don't mean throw out the whole system and start over. I was specifically talking about tinkering with how large we allow the banks to get. Me thinks you're over reacting a bit and assuming I'm wanting to completely change the current system.

[jerf]

"Perhaps they didn't set the right limits, kept them too small. Because we failed to get it right once doesn't mean we should stop trying and just accept being ripped off as a cost of doing business."

Ah yes, the classic "I know I'm right and we just need to try harder and better and it'll work next time" argument.

The problem with that argument is that it is too powerful. It applies to everything, equally. Consequently, it's a null argument.

If you want to argue about this, you need to be more specific and not just wave this magical "Staples Easy button (TM)" at the problem.

[gnaritas]

As opposed to what, the classic let's just do nothing, bury our head in the sand, and hope the market failure that just fucked us six ways from Sunday just fixes itself?

I was proposing a specific solution, limiting the size of the banks so we keep our current system but not allowing it to get too dependent on any one bank to eliminate single points of failure. Perhaps you missed that part.

[jerf]

No, you proposed a solution, received an evidence-based response, and waved it away with what I described.

Because you make bad arguments does not imply that the only alternative is to do nothing, or that that is my opinion. That's just a non-sequitor.