There's a debate raging between economists, regulators and commentators about the nature and purpose of regulation after the recession ends.
A key issue right now is about companies that are 'too big to fail'.
What are the arguments?
One side suggests that if big businesses like AIG, GM and the banks are too big to let fail because of the wider consequences to the economy, we should have smaller companies.
Not suprisingly, many think this is an oversimplistic arguement. Two issues come to mind. Firstly, size does not necessarily correlate to systemic risk to the economy (AIG failing and pulling the whole financial sector - and eventually the economy - down with it). Secondly, if a big company is about to fail and poses risks to the economy, shouldn't we come up with better ways to let them fail while preventing the shockwaves from tearing down the economy.
Free Exchange sums it up perfectly:
"It's hardly ever the market capitalisation of a firm that makes it dangerous; it's how leveraged the firm has become, or how interconnected it is with other financial institutions. Targeting size will reduce some of the benefits from scale in banks while leaving smaller but dangerous firms free to go on destabilising financial systems.
It's also curious that upon determining that too-big-to-fail is a problem many observers conclude that firms need to be shrunk, rather than concluding that big firms need to be better at failing. If attempts to control the size of firms are likely to prove ineffective and excessively costly, then why not develop measures to improve the procedures for failure of systemically-important institutions?
Firms are going to get themselves and financial systems in trouble, no matter what rules are adopted; of that we can be sure. Best then to build a resilient and flexible regulatory regime that attempts to make players pay for the unavoidable presence of a government backstop."
'Too big to fail is too big to exist' is a fantastic soundbite, but its also an overly simplistic proclamation on the cause of the current crisis. We need to be smarter than that.
We need better, more effective regulation that prevents future crises without sacrificing growth in the process.