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[Time] 44:40
Reaction when you put this hypothesis forward. Same issue: saying that history and empirical evidence suggest that there is a moral hazard problem is met with response that equity holders still have a risk. Lots of pushback, skepticism; practitioners don't like it. Less skepticism now than when book came out. There were a lot of people who thought that FDICIA addressed the problem and the book was just wrong. There are people who believe it's just not good public policy to impose losses on creditors of large financial institutions. Don't know what underlies that view--they must feel that it's potentially too disruptive. Third thing: the best thing to do is to make supervision and regulation sufficiently effective that you can prevent these episodes going forward. Given incentives we confront, that's not possible. We should make supervision effective but we shouldn't kid ourselves. The track record suggests it's not going to be sufficient. Arnold Kling paper: stiffened capital requirements, think there will be fewer systemic losses, but there is a political dynamic. Argument made by many is that we have to recreate Fannie and Freddie but this time we'll just have different restrictions so they won't get out of control.
Gary Stern on Too Big to Fail | EconTalk | Library of Economics and Liberty
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