As hated as they are, bailouts, until recently, were accepted as being a necessary evil: a safety net to preserve the financial system after regulatory measures fail. But bailouts today are deeply resented, despite the fact that they usually work to stop panics, and are much cheaper than letting everything go up in smoke. Recently the Fed admitted that it alone deployed $3.3 trillion to stabilize massively disrupted credit markets after the bankruptcy of un-bailed out Lehman Bros.
Banks are now told that the era of too-big-to-fail is over. The Dodd-Frank Act has forbidden bailouts, and will subject systemically important banks to "enhanced" regulation to prevent failure. Governments generally have loaded these banks with new taxes, fees and other expenses to recover taxpayer losses. Together with higher capital requirements of Basel III and a variety of regulations yet to be written, the composite new regulatory package hopes to suppress big banks' appetites for risk.
But, having removed the safety net, what the government needs is a fail-safe financial system. So far they haven't achieved it.
Read the full opinion editorial on eFinancialNews.com.