Not Too Big to Insure
Ed Glaseser argues for a clever way that financial firms can be regulated.
In an ideal world, the government would differentiate between entities that would receive public support under a limited set of circumstances and unprotected firms that would never be bailed out. These smaller, unprotected entities could be lightly regulated and would enjoy the advantages that accrue from unfettered innovation. The harder question is how to limit inordinate risk-taking by the protected financial firms, especially given the difficulties in evaluating the risk in their portfolios. Ideally, bigger firms that enjoy some sort of public guarantee should pay a “public insurance premium,’’ which would be a function of capital levels and risk.