Best policy requires best not second best approach

Comments on the report on Bair Seeks to Expand Power, Ending ‘Too Big to Fail’ (Update1), by Alison Vekshin, on http://www.bloomberg.com/apps/news?pid=20601087&sid=a2Hy2M0SSVqs&refer=home
28/04/2009

The report started with the following:
[April 27 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair sought authority to close “systemically important” financial firms, marking her boldest attempt yet to expand the agency’s reach.
The FDIC should be able to take over and shut bank-holding companies and other large institutions instead of just failed commercial banks, Bair said today in a speech at the Economic Club of New York. Such power would shield taxpayers from losses when government protects companies deemed “too big to fail,” a concept that should be “tossed into the dustbin,” she said.
“The FDIC is up to the task, and whether alone or in conjunction with other agencies, the FDIC is central to the solution,” Bair said. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program.”
The speech represents the first time Bair has said she wants the new power, countering arguments that the Federal Reserve is best equipped to manage the authority as Congress prepares to write legislation on the issue this year. Bair has previously said that some regulator should have resolution authority and suggested her agency could do the job. ]

Instead of breaking down or preventing big financial firms to reduce the risks of systematic failures, authorities could finetuning some regulations to minimise risks of failures of those firms by reducing their risk taking, and/or to attach conditions to any rescue measures so that the taxpayers will be paid back for the rescue actions, e.g. after the rescue and when they become profitable, they should pay some returns to the taxpayers. Any rescues are not forced and are up to firms to accept them. But authorities have the power to take over or nationalise if they don’t accept rescue and in the danger of bankrupcy. The condition requiring pay backs by rescued firms should be stated clear as part of regulations. So this will also naturally constrain firms’ behaviour and minimising moral hazard problem risks.

So, this represents a different approach to address the same problems, targeting the core of the problems and adopting best approach as opposed to second best approaches. Hope mine is a better one.