Courtesy of Simon Johnson, Baseline Scenario
This link to MIT Sloan’s website provides a partial transcript and video covering the points made below.
If Goldman Sachs were to hit a hypothetical financial rock, would they be allowed to fail – to go bankrupt as did Lehman – or would they and their creditors be bailed out?
I asked this question on Sunday to four leading experts (Erik Berglof, Claudio Borio, Garry Schinasi, and Andrew Sheng) from various parts of the official sector at the Institute for New Economic Thinking (INET) Conference in Bretton Woods – and to a room full of people who are close to policy thinking both in the United States and in Europe. In both the public interactions (for which you can review video here) and private conversations later, my interpretation of what was said and not said was unambiguous: Goldman Sachs would be bailed out (again).
This is very bad news – although admittedly not at all surprising.
Why wouldn’t policymakers allow Goldman Sachs to fail? The simple answer is that it is too big. Goldman’s balance sheet fluctuates around $900 billion; about 1 ½ times the size that Lehman was when it failed. All sensible proposals to reduce the size of firms like Goldman – including the Brown-Kaufman amendment to Dodd-Frank – have been defeated and regulators show no interest in tackling Goldman’s size directly.
The largest financial institution we let go bankrupt post-Lehman was CIT Group, which was about an $80 billion financial institution. Some people thought CIT should be bailed out; fortunately they did not prevail – and CIT restructured its debts in November-December 2009 without any discernible disruptive effect on the economy… continue here >
For more on the discussion at this INET session, see this page.
An edited version of this material appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.
