Why are politicians and statesmen reticent to challenge the theory behind “Too Big To Fail”? It seems that “Too Big To Fail” is the mainstream theory on how to best handle a big bank on the verge of collapse; however, it doesn't have a strong theoretical backing behind it as the following research paper suggests:
Too big to fail (TBTF) is a doctrine stipulating that big firms
(particularly financial institutions) cannot be allowed to fail
because of the potential adverse impact the failure may have on the
rest of the sector and the economy at large. When they are in trouble,
financial institutions utilise the language of fear to demand the
privilege of TBTF at a significant cost to taxpayers. From the
perspective of costs and benefits, the TBTF doctrine must go the way
of the dinosaurs.
So how come politicians are reticent to challenge the status quo and be willing to break up large banks when a crisis hit?
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