The Magazine

Soft Landing

Why 'too big to fail' leads to costly mistakes.

Nov 23, 2009, Vol. 15, No. 10 • By EMILY ESFAHANI SMITH
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Capitalism didn't fail; companies did--after having adopted the idea, en masse, that any loan, bond, or other bank asset, could be sliced up and turned into an instantly liquid, priceable, and tradeable security, with all its risk quantified and distributed scientifically to parties willing and able to bear it.

If those companies had been left to die, their bad ideas would have been buried with them. As it is, the ideas still live and are being recycled as banks continue to take opaque risks, reap the short-term benefits, and expect the feds to catch them when they fall.

Emily Esfahani Smith, a Collegiate Network fellow, is an editorial assistant at THE WEEKLY STANDARD.