Potentially great news being reported today that the Obama administration will present comprehensive proposals for financial reform that are close to what Paul Volcker has been asking for.
At the core of this issue is the need to make sure that “too big to fail” means “too big to exist”. As long as these financial institutions believe that the next time they blow themselves up, that we, the taxpayers, will be there to bail them out because they are “too important”, we’ll continue to have these crises.
We need smaller institutions whose individual failures could be digested by the financial system. Related to this we need to separate the side of the business that essentially takes massive risky trading bets from the part that does traditional banking. In the Fall of 2008 there was serious concern that money wasn’t going to come out of the ATM’s the next day. This is a great first step to ensure that we don’t find ourselves in that terrible position again.