Gerald Epstein: Too-Big-To-Fail Advantage Remains Intact For Big Banks

Gerald Epstein:
Yeah, well, I think there are some noteworthy things. First of all, just to explain what this means, what it means is that these largest banks, like Bank of America, Goldman Sachs, JPMorgan, and so forth get an advantage when they borrow money in the financial markets, because the people who lend them money believe that if they get into trouble, the government will bail them out, that the taxpayers will bail them out. And this has been known since at least 1984, when Continental Illinois Bank almost went under and the government bailed them out, and then the government said, well, we're going to bail out the 11 biggest banks that are too big to fail, and we're going to bail them out in the future. And, of course, that's exactly what happened in the financial crisis of 2007-2008. So when investors lend money to these big banks, we've thought for a long time that they expect that they're going to get bailed out if they get into trouble, so they'll charge less money to these big banks...


  1. There is a simple solution to all this: full reserve banking. Under full reserve, as pointed out by Milton Friedman and others, the existing banking industry is split into two halves. One half accepts deposits, but does nothing with those deposits except lodge them at the central bank. So that money is 100% safe, ergo bank failure cannot stem from that source, so no taxpayer funded subsidies are needed there.

    The second half DOES LEND ON DEPOSITORS MONEY, but that second half is structured like mutual funds. That is, depositors (not banks) choose what their money is invested in. And if the investments or loans do badly, then the investor / depositors make a loss. Ergo banks as such cannot fail. End of bank subsidies.

    For Friedman, see Ch3 of his book “A Program for Monetary Stability”, starting at the heading “Banking Reform”.

    For Lawrence Kotlikoff’s version of much the same system, see:

    For Prof. John Cochrane’s version, see:


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