Robert Solow, winner of a 1987 Nobel economics prize, says the U.S. financial system has become too unwieldy to avoid the demise of financial institutions considered “too big to fail.”The 88-year-old professor emeritus at MIT says the size, complexity and interconnectedness of the U.S. and global financial networks make it harder than ever to judge potential threats to the system. Even the best risk-prevention practices probably won’t stop large banks or other institutions from failing again in the future and damaging the broader economy.
We have long argued on this blog that the financial system is exceeding fragile despite the appearance of stability.
Banks are not required to keep adequate tangible capital to produce a robust banking system.
Fractional reserve banking means the risk of bank runs and bank holidays remains very real and endangers the entire system.
Governments enable the banks to take higher and higher risks in exchange for the blind eye that is turned on the extreme risks taken so banks will buy their sovereign bonds.
Yes, dear reader, the fox is indeed guarding the hen house.
Under this blatant and systemic system of moral hazard, certain failure of a large institution seems inevitable.
The question we must ask is this - how do we protect ourselves?