Marketplace has a new podcast for kids, "Million Bazillion!" EPISODE OUT NOW
Fallout: The Financial Crisis

Officials fear systemic risks of bailout

Steve Henn Oct 21, 2009
Fallout: The Financial Crisis

Officials fear systemic risks of bailout

Steve Henn Oct 21, 2009


Kai Ryssdal: First things first about all that bailout money. The TARP inspector general, Neal Barofsky, released a report today saying the odds of taxpayers getting all of it back are slim. Not really a surprise.

More interesting, though, is what Barofsky had to say about what government intervention has done to the financial industry’s long-term stability.

Here he is on CNBC this morning:

NEAL BAROFSKY: Because of the moral hazard, because of some of the systemic risks that are associated with making these institutions bigger and bigger, trimming their competition, and giving them the opportunity to take more and more risk, systemically we may be in a more dangerous place even than we were a year ago.

Marketplace’s Steve Henn picks up the story.

STEVE HENN: Barofsky’s not the only one who’s worried about this.

MERVYN KING: The too important to fail problem is too important to ignore.

Mervyn King is the governor of the Bank of England. He says the global banking bailout:

KING: Has created possibly the biggest moral hazard in history.

Banks that were “too big to fail” couldn’t go bankrupt, so executives were free to take wild risks. The bailout made the largest banks even bigger by forcing mergers. So King and former Fed Chairman Paul Volcker are now calling for banks’ breakup.

Economist Simon Johnson agrees.

SIMON JOHNSON: What you need is to make these bigger banks, the biggest banks, small enough so you can handle the management of each one of them individually or even if they fail in something of a group. But that doesn’t destabilize the entire economy.

But can you imagine Congress breaking up Goldman Sachs? Not likely. And many believe it would be impractical.

Hal Scott teaches bank regulation at Harvard law school.

HAL SCOTT: So if we break up our banks and Europe doesn’t break up theirs and the Chinese don’t break up theirs, this is going to have an immense impact on who are the players in the international banking system.

So Scott backs the administration’s idea of giving regulators the power to dismantle huge failing institutions. Bank investors would still take the losses, even if the government propped up a bank to save the larger economy.

But doubters think bank executives still seeking millions will take huge new risks down the road.

In Washington, I’m Steve Henn for Marketplace.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.