Think tank: Force the big banks to shrink

We have to get tough to avert another crisis

Simon Johnson and Peter Boone

The global financial system remains on track for a devastating collapse. The core problem is that we bail out big banks each time they fail, so — not surprisingly — they dust themselves off and gamble madly with our futures once more.

Each time we have a near-collapse, the UK government is forced to do more to save the day. This time, interest rates have ended up near to zero, meaning pensioners and other savers get no return on their funds, and we will double our public debt. The UK needs a cheap pound for a long time to get out of its mess — partly to encourage foreign investors to finance those large budget deficits. We simply cannot continue such bailouts and the level of fiscal spending that these imply. Most of the developed world is today on a policy path that, unless changed, will lead to big crises.

The core problem is worse than it was prior to the failure of Lehman in September 2008. The financial sector in Europe and the US has learned that all big banks are truly too big to fail. These financial institutions now have great incentive to start taking risks again and can easily raise huge amounts from credit markets because lenders know there are implicit government guarantees.