Matt Yglesias offers up a solid line of reasoning:
To that end, what’s the deal with banks that are too big to fail?
If we can identify such banks, why not try to make a rule preventing banks from becoming that big? As a tradeoff, banks that rested in the small-enough-to-fail category could be allowed to operate with much, much laxer oversight and regulation since everyone would understand that if they fail they’re going to sink. Presumably, there are some efficiency gains associated with the economies of scale involved in big financial institutions. But there would also be efficiency gains associated with relaxing the regulations on financial institutions. And the only reasonable way to seriously relax those regulations would be to commit to a no-bailouts scenario. But to do that, we need to make sure the banks aren’t too big to fail. So why not focus the regulatory effort on that — on making sure that institutions don’t get so big that they need bailing out?
I suspect Matt knows why this suggestion doesn’t stand a snowball’s chance in hell of gaining any traction. The answer is that being an executive at an institution that’s too big to fail pays a helluva lot more than being an executive at an institution that’s small enough to fail. And fantastically wealthy executives presiding over too-big-to-fail institutions wield outrageous amounts of power, and have undue influence on politicians. They will never let their absurd salaries be jeopardized by regulations preventing banks from being big enough to afford absurd salaries for executives.
