It has been debated, but no one knows what to do. First in London, then Pittsburgh and now at Davos. The world does not know how to make its big banks safe. “Too big to fail” bailouts are deeply unfashionable with electorates, but bankers don’t seem to mind them.
At Davos, one proposal was to create a rescue fund, the so-called resolution fund, to manage the affairs of troubled institutions that threatened the financial system at large. It has, predictably, run into problems. Who will run it? How will the money come for the fund? These are, however, just surface issues.
The big problem is, can moral hazard ever be eliminated when banks know that rescue packages are around the corner? No one wants to talk about that.
Eliminating moral hazard will require a basic redesign of the global financial architecture. Expectations of huge profits being whipped out of thin air and magic in financial markets will have to be given up. After the initial shock of the 2008-09 crisis, that matter has not returned to the reform agenda.