The “Too Brittle to Sustain” (TB2S) Club represents an alternative theory to the widespread view, “Too Big to Fail” (TB2F). In the recent recession; financial, economic, and general news has been dominated by the theory of TB2F. In this theory, the largest and most powerful economic actors in the economy are seen as too interconnected, too valuable, or posses to great a market share to allow them to fail. This was the theory behind the response to the Crash of 2008, culminating in the TARP program, and various credit channels offered through the Federal Reserve. Accepting the theory of TB2S as the “cause” of the recession has led to calls for various forms of financial regulation — most radically breaking up the biggest banks (also see Konzcal). If breaking up the banks is not the road we will travel, then we must live with, and design a much broader regulatory structure that limits the downside risk to economies of scale.
In contrast to this theory stands TB2S, a theory that states the biggest banks have tipped the scales of efficiency in a way that makes their structure very brittle, and prone to failure. Under TB2S, it is not the size of the economic actor that threatens macroeconomic stability, but the composition of the balance sheet, and the evolution of markets and networks that amplify certain assets over others — giving them such a competitive advantage in ROI as to make them the disproportionately preferred assets. The implications of TB2S have much different consequences for the structuring of financial markets after the Crash of 2008. It is generally believed among proponents of TB2S that monetary policy became too contractionary relative to the needs of the economy in the second half of 2008. As such, this caused a fall in velocity that exacerbated problems in the financial sector, and created problems elsewhere in the economy. Under TB2S, it is the government’s structure of the market that created favorable conditions to the development of homogeneous assets, which led to extreme gains in efficiency, while at the same time eroding the robustness of the network (weakest link, and all that). The solution under the theory of TB2S is not breaking up big firms…indeed, economies of scale are greatly appreciated. We believe that the market should be devoid of favoritism (by subsidy or regulation) of particular asset classes, allowing a more robust network to emerge. We believe that the path to future prosperity lies in restoring economic diversification in Business Plans, and allowing fair competition. The regulatory structure should take a disinterested approach in helping shape a market that is both more impervious to breaking, and easily repairable. (Disclaimer: Some of the authors below take a different stance on the structure of the solutions to the TB2S problem.)
The TB2S theory is arguably quite “Minskian” in nature. However, I personally place a lot of weight on nominal shocks. The TB2S theory is one that is evolving out of my readings about the recent financial crisis, and studies of the economy in general.
Some of the proponents of TB2S (namely, myself) even implicate the monopoly of state-issued currency in creating macroeconomic instability, and advocate various complementary currencies (or Hayekian competitive currencies) to bring diversity to the economic ecosystem, and increase its resilience.
Below is a list of people who have written articles, or made statements consistent with the theory of TB2S. They are placed on this list at my discretion, and may not agree with the above characterization of their broader views. If anyone wishes to be added or removed from the list, please e-mail me (with a reference to your writings if applicable, so I can link them!), and I will promptly comply with your wishes.
The “Too Brittle to Sustain” Club
- Niklas Blanchard (It Don’t Mean Much, These Seats are Cheap)
- Leigh Caldwell (Knowing and Making, Inon)
- Arnold Kling (EconLog, Mercatus)
- Garett Jones (GMU)
- Scott Sumner (TheMoneyIllusion, Bentley University)
Posts Related to the Ideas of TB2S
- Chalk Two Up for “Too Brittle to Sustain” (Niklas Blanchard)
- Too Big to Fail? Or Too Brittle to Sustain? (Niklas Blanchard)
- Making Markets…Be Markets? (Niklas Blanchard)
- Complexity? Or Efficiency (Niklas Blanchard)
- My Idea Financial Reform Bill (Arnold Kling)
I’m using this term fairly loosely, but am judging by what I consider their tentative acceptance of the “Scott Sumner story” of the recession. Just a note, Arnold Kling does not.
This doesn’t necessarily mean that people advocating the TB2F view necessarily disagree with these ultimate goals, just that they differ in their prognosis of the problem, and their prescription regarding how to achieve these goals.