Thursday, December 10, 2009

Why those who are too big to fail should be charged ? !

There has been ample debate about need for greater regulation of financial firms. Am sure with so many people employed with financial firms and so many other blaming their unemployment on the same firms, there are opinions on both sides. There are two points on which I have a definite thinking. The consumer protection laws and need for such a agency and the second, the subject of this post, that firms who are too big to fail should be asked to comtribute to 150 billion dollar fund.

The second point is a part of the bill being debated in the house to overhaul the regulation of financial sector. I think it makes perfect sense for such a fund and asking firms to contribute to it in relation to their size. The simple logic is this. So far it has been illustrated that too big is actually an insurance against failing. Because by now everyone knows if you are too big and 'interconnected', you will (have to) be bailed out by the government. To big is then actually an insurance in itself, leading to the moral hazard and temptation of, often, indulging in risky business practices. So like any other insurance, it makes sense that a premium be charged for it.

Update [ Jan 6, 2009] - On, a slightly different note, I think its important that I put down the name of the bill. The bill is called, "Wall Street Reform and Consumer Protection Act." No campaign speech that, a really name for a law. Yes, there is a lot in a name. My apologies to Shakespeare. But then he hadn't met the politicians of today