Still, the fact is, creditors are expecting us to bail them out. Which means lenders are more likely to help them get into trouble, from which they will need to be bailed out. And the fact is, the lenders are right. In that moment of crisis, it will be too dangerous to crush the market's implicit assumptions, for fear of spawning further chaos.
That implicit guarantee is very valuable, and the taxpayer should get something in return. But more important is making sure that the federal government is prepared for the possibility that we may have to make good on those guarantees. If we're going to levy a special tax on TBTF banks, let it be a stiff one, and let it fund a really sizable insurance pool that can be tapped in emergencies. Like the FDIC, the existence of such a pool would make runs less likely in the shadow banking system, but it would also protect taxpayers. Otherwise, with our mounting entitlement liabilities, we run the risk of offering guarantees we can't really make good on.
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