Ben Bernanke, speaking to a conference of financial and economics school teachers, said that too-big-to-fail banks were one example of the combination of government and market failures that can hurt the economy.
“Finally, I’d mention the too-big-to-fail problem, which is sort of a combination of government and market failure,” Bernanke said on Tuesday at the event in Washington, D.C. “Institutions which are so big and complex and interconnected that their failure would possibly bring down the financial system — there is a strong presumption in the markets that the government will protect those institutions and that means that [the] market is not allowed to work, in a sense.”
Bernanke said the presumption of a government bailout of such large companies stopped the market from functioning efficiently by allowing investors to make risky deals with these large banks, or not care about what the banks do, because the investors think the government will just bail them out.
“[P]eople who lend money to those institutions say, ‘Well, I don’t have to worry about whether they’re making good investments or taking too much risk because I believe that if they get into trouble the government will protect them,” he said.
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