Wanting to avoid financial and banking crises at all costs would be a serious mistake

We know how to prevent financial and banking crises: Overcapitalise financial intermediaries; Require financial intermediaries to hold excessive quantities of risk-free and liquid financial assets, eliminating the risk of default and liquidity cris e s among these intermediaries; Reduce the size of banks and financial markets by having companies self-finance their investments; Segment financial markets along country lines and sever interconnections between financial intermediaries to prevent the transmission of crises and the occurrence of systemic crises. Unfortunately, these developments, which would indeed prevent crises, would lead to very severe inefficiencies: Worthless use of savings; Elimination of financial intermediaries’ role of investing in risky, long-term projects from short-term and risk-free household savings; S queezing of wages to increase corporate earnings ; Poor international allocation of savings and weak risk diversification.