What is the problem of too big to fail? Surely not that senior executives expect to keep their jobs if there is a bailout — they often don’t (I would like to take this further by having a decent cull of senior people in any institution that receives a bailout). Is it that lenders know that the institution is too big to fail, and therefore lend at lower rates, after which human nature takes its course? If that is so, why not create a scheme to reduce the spread between borrowing and lending rates for large financial firms, in the same way that interest rates are increased to cool the whole economy? A tax on interest paid by big banks, perhaps, varied by the Federal Reserve, higher for TBTF banks, and varied like the Fed Funds Target Rate?

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