Too big to fail

Reader rjs points us to:

Everyone’s Missing the Bigger Picture in the Reinhart-Rogoff Debate –

But whether you believe that the errors in the RR study are fatal or minor, there is a bigger picture that everyone is ignoring. Initially, RR never pushed an austerity-only prescription. As they wrote yesterday: The only way to break this feedback loop is to have dramatic write-downs of debt. Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that “authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership.” Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work. Indeed, the nation’s top economists have said that breaking up the big banks and forcing bondholders to write down debt are essential prerequisites to an economic recovery.

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Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression. Unless we shrink the financial sector, we will continue to have economic instability.