I will be speaking at an event on Capitol Hill on Tuesday, September 15. This is an anniversary of sorts for the financial crisis, and that is the topic for the event. I am planning a really hard-hitting talk. I am looking forward also to a talk by Russ Roberts.
I hope that reporters attend, for background if nothing else. As far as I know, the event is open to anyone, but advance registration is required.
One of the ideas that I might try to briefly outline is that we could use a paradigm shift in thinking about systemic safety. That is, instead of treating it solely as a regulatory problem, we should think of it as a business continuity problem. Rather than focus everything on trying to prevent failure, we should put effort into enabling our financial system to withstand failure. (Yes, I'm still beating my easy-to-fix rather than hard-to-break drum.)
Suppose that we had in place plans and processes to ensure that even with institutional bankruptcies, the ATM's will operate correctly, credit card transactions will be processed, mortgage payments will be properly credited, and so on. That is, everyday financial transactions will not be disrupted. We do not necessarily need to guarantee continuity in every financial transaction. I would be inclined to omit credit default swaps and mortgage securities from the business continuity plan, for example. But where to draw the line is something to think about.
My point is that I would like to see regulators have sufficient business continuity procedures in place so that when a big financial institution gets in trouble, we have a viable and credible option for allowing it to fail. If we know that it can fail without breaking the ATM's or other everyday financial processes that involve ordinary people directly, then we have a better chance of convincing market participants that failure is an option. If financial institutions believe that failure is an option, then they will take more prudent steps to manage their own risks, and they will be more inclined to control their exposure to institutions that are not behaving prudently.
I have at most a minute or two to touch on this idea, and I worry about whether people can grasp it that quickly. Your thoughts welcome.