How Political Clout Made Banks Too Big to Fail

Published: Wednesday, June 13 2012 12:00 a.m. MDT

Luigi Zingales is a professor of entrepreneurship and finance at the University of Chicago Booth School of Business, a contributor to Business Class and a contributing editor of City Journal. This is the first of three excerpts from his new book, “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity,” which will be published in June by Basic Books, a member of the Perseus Books Group.

"The U.S. has historically kept the financial sector in check through a combination of sound principles and serendipitous decisions. But as the financial system gained strength in recent years, it also gained political influence. In the last decade, it has become too concentrated and too powerful, which has damaged not only the economy but the financial sector itself."

"Worse, “too big to fail” creates a self-fulfilling prophecy: Shortsighted policy makers will always prefer the cost of a bailout to the cost of upsetting the market. As a consequence, the problem continues and expands."

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