The governor of the Bank of England, Mervyn King, gave a speech (pdf) yesterday in which he made some tart observations worth repeating:
It is hard to see how the existence of institutions that are "too important to fail" is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk.
Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.
Mr. King's skepticism of the ability of regulators -- "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." he says -- and his support for separating different kinds of bank activities echo the views of a former chairman of the Federal Reserve, Paul Volcker, whose views are detailed in a New York Times article today.