Too Big To Fail is not the real problem

As I see it, the issue of solutions to address the problems revealed by the financial crisis is not breaking up Big Banks deemed too big to fail, but rather preventing  the risk of contagion once problems arise. Once panic sets in it spreads throughout the interconnected financial world, whether it's 10 big banks or 50 smaller ones.

Example-- securitizations were actually designed and thought to contain and reduce risk through wide spread diversification and broad dissemination of risk across a very wide universe of investors.

In fact when the housing bubble burst those securitizations actually spread the contagion to those many interconnected investors. Rather then reduce the risk as everyone thought,  this interconnectedness actually spread the contagion of the initial  panic.

Once again I go back to my view that the root cause of the financial crisis  was unregulated subprime lending; made by relatively small and under regulated lenders, virtually none of whom were Big Banks.

Of course the banks that securitized those loans are culpable as well , but breaking them up won't solve that problem. Lehman Brothers was actually pretty small.

The whole subprime phenomenon  was allowed to happened based on the political decision ( both parties) to push for home ownership for " everyone", regardless of creditworthiness. "Liar" loans to NINJAS ( no income, no jobs, no assets, and of course no money down). 

Once the collapse started with the subprime loans,  even well underwritten loans went under with the plunge in property values. When that happened the whole global financial market eventually froze. The rest is history. 

As Paul Krugman pointed out years ago, Canada only had 5 Banks in the whole country and they were all too big to fail; yet Canada didn’t have the same financial crisis problem we had. By law, Canada had virtually no subprime lending. Only credit worthy borrowers, who put down 20% , could get mortgage loans there.

That's how you solve a problem ( at least the last one) .  Banks should be more tightly regulated in a way that insures ( to the extent possible) that they make only "good " loans rather than simply be broken up.

 If that reduces their profits , so be it. 

Eric