Banking's `Toxic Cocktail' Is Too Big to Forget: Simon Johnson

[pollyannaish]

Bloomberg:

As a senator from Delaware in 2009- 10, Ted Kaufman fought long and hard against the systemic dangers posed by large, highly leveraged U.S. banks. When he left the Senate, at the end of the last Congress, there were some who supposed that his arguments would now get less attention at least from mainstream thinking.

But far from dying out, the points Kaufman made seem to have taken hold within influential government circles.

The latest quarterly report from Neil Barofsky, the special inspector-general for the Troubled Asset Relief Program, is the best official articulation yet of why too big to fail is here to stay. In its executive summary, the document, which was released this week, discusses “perhaps TARP’s most significant legacy, the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’”

This reasoning builds on evidence presented in Barofsky’s recent report on the “Extraordinary Financial Assistance Provided to Citigroup Inc.” But it goes much further with regard to the general policy issues we now face. Barofsky credits Henry Paulson and Timothy Geithner with making it clear that TARP funds would be used to prevent any of the country’s largest banks from failing during the global financial crisis and thus “reassuring troubled markets.”

‘High-Risk Behavior’

But the very effectiveness of Treasury actions and statements in late 2008 and early 2009 had undeniable side effects, “by effectively guaranteeing these institutions against failure, they encouraged future high-risk behavior by insulating the risk-takers who had profited so greatly in the run-up to the crisis from the consequences of failure.”

[pollyannaish]

So very depressing.