Simon Johnson, a former IMF economist, has a piece on his Baseline Scenario blog today about former Treasury Secretary Hank Paulson's testimony to Congress yesterday, which he ties into the larger story of how we let a handful of banks control such a formidable swath of our financial system. Even as we collectively intoned the lesson Too Big to Fail is Bad, Too Big to Fail is Bad, we're seen Countrywide Financial, the mortgage lending giant, and Merrill Lynch swallowed by Bank of America, while JP MorganChase absorbed Bear Sterns and Washington Mutual. And we didn't just allow this to happen. At times, we forced it to happen.
As a result, we've avoided government nationalization at the expense of basically allowing JP Morgan and Bank of America to nationalize the banks for us.
Why is that important? Because it puts the future of bank regulation in an awkward spot: 1) We're allowed these BofA and JPMorgan to get Way Too Big to Fail; 2) Now that both banks are reporting quarterly profits, they'll be untethered to government assistance for the conceivable future; and yet 3) These giants, and Goldman Sachs, know that if profits do slump in the case of a double-dip recession, the government has to leap in because they are, definitionally, Way Too Big to Fail.