Today, it is clear that the U.S. financial sector needs to shrink. As another one of your former classmates, Ken Rogoff, has pointed out, the financial sector has accounted for an unusually large share of corporate profits in recent years. It is time for this country to shift talent and capital elsewhere. In order for that to happen, some firms in the industry need to tighten their belts, some weaker firms need to merge with stronger firms, and the weakest firms need to fail. As tempting as it is to intervene in this process to try to make it more orderly, dislocation is inevitable, and intervention may only make it worse.
We have excesses. Too many housing units. Too many "homeowners" who don't have equity in their homes and never did. Too many banks and financial institutions. The excesses need to be worked out by the markets.
Also, it looks like the U.S. taxpayer will be bailing out foreign banks, too.
More from Sebastian Mallaby.
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