Preventing the Fire Next Time: Too Big To Fail

The financial crisis of 2007-2009 threatened the very fabric of the financial system and ultimately the entire economy. At the nadir in the fall of 2008, there was global financial contagion. Multiple major financial institutions failed or virtually failed; even leading financial institutions would no longer extend credit to each other; the commercial paper and securitization markets shut down; and investors fled the money market funds. The consequences of a total financial collapse may not have been limited to the financial system or even to the broader economy. There could have been profound social and political unrest of the type not seen since the 1930s. The dictatorships and demagogy of that time had many roots, but undoubtedly a principal one was economic desperation. A total catastrophe was avoided only through massive government assistance -- both to individual financial institutions and to entire classes of financial institutions -- as well as a very large measure of luck.