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In large part, the TBTF mythos is viable because the financial regulator has no experience with resolving systemically important banks.

And there's a variety of reasons you can't drill that sort of thing during the crisis:

  1. Resolving the banks today would not restore the economy - for that, you need ye olde Keynesian fiscal policy. Speedy bank resolution is what you do to avert a crisis, not what you do to cure it.

  2. When a policy has been decided upon - no matter how wrong-headed - a certain amount of institutional inertia sets in. If, three years ago, resolving the big banks seemed like an intimidating task, then it is unlikely that it will have become any less intimidating as the economy went down the crapper.

  3. You want to conduct these drills while confidence is high. If you drill for the supposedly impossible while it still seems impossible to The Serious People, you will just seem overly cautious. If you begin gaming out major bank resolutions and speculative attacks on your currency when it is unspoken common knowledge that your banks are insolvent and your currency too high, then they risk becoming self-fulfilling prophesies.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 20th, 2011 at 04:42:10 PM EST
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