More than three years into the most significant structural crisis of modern history, the flaws that caused it are still looming around like the strokes of midnight in a horror movie.
A main problem is Moral Hazard. Some banks have reached such a big size that their failure would jeopardise society. Thus, these Banks enjoy an implicit rescue guarantee from governments that are ready to intervene to prevent failures with public money.
The largest ever rescue has already taken place. As Dr. Mervyn King stated, “Never, in the field of financial endeavour, has so much money been owed by so few to so many”. Without that and a promise of an unlimited guarantee, no bank on this planet would have survived.
This article was originally published by Roubini Global Economics.