24 June 2011
Book buys into banks debate
If a bank is too big to fail, it is too big to exist. That is the nub of the argument advanced in a new book by an RMIT University academic.
Professor Imad Moosa.
Professor Imad Moosa, from the School of Economics, Finance and Marketing, said The Myth of Too Big to Fail argued strongly against the use of taxpayers' money to bail out failing banks and suggested alternative solutions.
"I make three key points. We need regulation to separate commercial banking from other financial activities, thus containing the cancerous growth of banks.
"Second, there needs to be the kind of regulation that minimises the probability of bank failure, hence the need for taxpayers' money.
"And third, if a bank must fail, let it fail. There is no evidence in history to support the apocalyptic scenario typically drawn by banks to show that the failure of one or a group of banks causes a systemic failure and the collapse of the payment mechanism."
Professor Moosa has served in advisory positions with institutions including KPMG, AUSAID, the US Treasury, the Central Bank of Kuwait and the United Nations.
The Myth of Too Big to Fail grew out of the increasingly widespread notion that failing big firms must be saved by government because their failure represents unacceptable systemic risk.
"I became interested in the topic as a result of the heated debate following the rescue, among others, of Citigroup and AIG in the US and Northern Rock and the Royal Bank of Scotland in the UK," he said.
"The global financial crisis has brought the too big to fail (TBTF) debate back to centre stage, where it once was following the rescue of Continental Illinois in 1984 and Long-Term Capital Management in 1998.
"The difference on this occasion lies in the amount of taxpayers' money that has been put into the rescue operations.
"Some people, including myself, question TBTF rescues not only on economic, but also on ethical and moral grounds.
"This book is highly (but fairly) critical of the TBTF doctrine and related issues such as laissez faire finance, the trend towards massive deregulation, and the undeserved status of the financial sector in the economy.
"It is critical of not only the practice but also the ideas that drive the practice, some (or most) of which are the products of academic work."
The Myth of Too Big to Fail is published by Palgrave Macmillan (London).