Extending “too big to fail”

This weeks Economist has an article about extending the definition of “too big to fail” to include a number of other types of financial business.

When dealing with banks I think we need to distinguish between too big to fail and too important to fail,

When any business fails its shareholders and customers stand to lose. Is it the responsibility of government to protect shareholders and customers from the risks of doing business?

Financial intermediaries which take deposits, make loans and follow fractional reserve policies, i.e. banks, are  special cases in that in making loans they are creating the money supply with which we exchange goods and services.  This makes them too important to fail because a bank failure decreases the money supply.

One has to note most bank deposit customers are protected by deposit insurance to the extent there is enough money in the insurance fund.

This money creation role provides the rationalization for regulating banks and other financial intermediaries.  But what is the rationalization for regulating other types of business that handle money?  Perhaps by extending regulatory powers it appears the authorities are doing something about the economic crisis.

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