What Chris Brown, anger management, T-B-T-F banks and payday loans have in common

by. Henry Meier

One charge that makes the Lords of Finance angrier than Chris Brown in an anger management class is the suggestion that Too-Big-to-Fail (TBTF) banks enjoy an unfair advantage over their smaller financial counterparts because they can make more aggressive loans and investments secure in the knowledge that in a worse case scenario, they will be bailed out by the American taxpayer.

The latest evidence for this hypothesis was released recently by that bastion of left-wing extremism – the Federal Reserve Bank of New York. Specifically, a paper by two of its researchers concludes that “Too-Big-to-Fail banks engage in riskier activities by taking advantage of the likelihood that they’ll receive government aid.”

In previous work, the same researchers demonstrated that T-B-T-F Banks have lower borrowing costs because people know that, the protestations of the political class notwithstanding, if these mega-behemoths can’t pay their bills the federal government will.

It’s one thing to have advantages because of your economy of scale – Capitalism is supposed to work that way – it’s quite another to be so big that the free market can’t discipline a bank’s conduct and the political class is too dependent on campaign contributions and too nervous about tanking the economy to step into the breach by building real firewalls.

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