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In the financial crisis of 2008/2009, many countries bailed out their banks. The United States not only bailed out some of its banks, but also AIG, a non-bank which was deemed to be "systemically important".

This was greeted with outrage by the public - a large majority of Americans opposed the bailouts at the time, for example.

A key problem with bailing out institutions that are deemed "too big to fail" is moral hazard - as commentators from both left and right have emphasised, it lets "systemically important institutions" get away with making risky or even stupid decisions, and still survive. Meanwhile, they continue to pay bonuses and make investments - with bailout money!

So, are there any strategies that have been implemented that can mitigate these effects? If so, what is the likelihood of successful passage through the U.S. Congress, and what would the expected opposition look like? How can we avoid the "too big to fail" problem reoccurring in future - while maintaining an entrepreneurial economy with investment decisions made by the private sector?

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    (let them fail.) – user1873 Nov 19 '13 at 22:22
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    @user1873 Easier said than done. Just announcing "from now on, there will be no more bailouts" does not have much credibility. – Robin Green Nov 19 '13 at 22:35
  • The piece of legislation that was designed to stop or at least mitigate this problem was Dodd-Frank. Unfortunately I'm not too familiar with the bill. I may do some research and get back to this answer later. – Avi Nov 20 '13 at 3:14
  • Likelyhood - NONE. The DNC is too deep in the pocket of Wall Street. – user4012 Nov 22 '13 at 15:22
  • "How can we avoid the "too big to fail" problem reoccurring in future" - according to Nissim Taleb, by moving away from the concept of debt and into more equity (he's the person who popularized the term "Black Swan", btw) – user4012 Nov 22 '13 at 15:23
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So, are there any strategies that have been implemented that can mitigate these effects?

Bourgeois nationalisation. See British Rail as a key exemplar where the state took over a failing essential industry where private capitalism had failed. State capitalism both accounted for the essential nature of rail, and in the long term allowed the return of this industry to private capital. The state is often called upon by private capital to take over private capital's debts.

If so, what is the likelihood of successful passage through the U.S. Congress, and what would the expected opposition look like?

It'd look like F.D.R., it would face overwhelming opposition from the bourgeois organised right, and thus from a populist right; but, it would probably hegemonise the extraparliamentary left. Also, the problem wouldn't be in Congress, it would be on the streets.

How can we avoid the "too big to fail" problem reoccurring in future - while maintaining an entrepreneurial economy with investment decisions made by the private sector?

This question is too large to adequately answer, particularly as it goes to live debates in political economy. From a Marxist perspective it is impossible to avoid as monopoly formation is the natural action of the value form. Other answers will depend on similarly situated political economic opinions.

  • No citations? No discussion of Dodd-Frank? – Avi Nov 23 '13 at 0:19
  • Or you could shrink the question to a contemporary US specific policy question instead of a universal. British Rail is obvious from any institutional history. Opposition to FDR reconfiguring US capitalism for survival, similarly. The final is obviously Capital, in particular Capital III. – Samuel Russell Nov 23 '13 at 22:40
  • Great, then provide evidence for your opinions on those subjects. – Avi Nov 24 '13 at 4:54
  • The Beeching Report & Railways Act 1993. The extent of opposition to FDR's programme, and its amelioration of trade union discontent as a proxy for system ending threats to capital is bleeding obvious; but, for more, consider the 1940/41 no strike pledges over CIO wildcats. For the final, any basic political economy course. – Samuel Russell Nov 24 '13 at 20:50
  • @Avi - Samuel is right. The answer strongly depends on ones political philosophy. Also, Dodd-Frank is mostly a sham (now that it's live, do you SERIOUSLY think that a Democrat-controlled huge bank or financial firm will be allowed to go bancrupt?) – user4012 Dec 25 '13 at 13:54
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In a pure free market the problem would be resolved by smaller companies popping up to fill in the void left by the collapse of the huge company under its own weight of mismanagement, corruption, looting, and poor business decisions. These smaller companies would over time grow or fail based on their ability to fill the market need, avoid the mistakes of the predecessors, and develop better policies than those that brought down the behemoths in the first place.

The only reason the auto companies and the big finance companies were to big to fail was because their failure would have had serious repercussions on the people who run the government. Not just the people elected but those people who are in-charge of the regulatory agencies that failed to notice the illegal activity, and the people who were profiting off of that activity. Had these industries been allowed to collapse it would have been painful but it would have been like taking of the band-aid, it hurts quite a bit all at once but the pains subsides relatively quickly and the problem resolves it self. Instead of taking off the band-aid we chose to put a bigger band-aid over the top of the first band-aid. Eventually the band-aids will have to come off... and when they do the pain will be much bigger. So instead of mitigating the problem, we have allowed the problem to be compounded.

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