Alan Greenspan on Eliminating Too Big To Fail (2008)

“If indeed there are firms in this country that are too big to fail, it necessarily means that investors will give them moneys at lower interest rates because they’re perceived to be guaranteed by the Federal Government. The result is that they have a competitive advantage over smaller firms and that creates huge distortions in the system. So the question is, ‘Is it feasible to eliminate too big to fail?’ And, y’know, once you’ve gone down this road, everyone is not going to believe you. But remember that we used to argue strenuously that Fannie and Freddie were not backed by the full faith and credit of the United States Government because that’s what the law said. The markets didn’t believe that … I think the first thing you have to say – at a minimum – is that we have to eliminate the larger institutions’ subsidy. And one way to do that is either raise capital charges or raise fees. But you cannot allow it to go on without very serious consequences. At the end of the day, there’s got to be something which penalizes those firms which move above the level where they’ve become too big to fail. And that raises some very, very large questions”