The current financial crisis has popped a few popular myths about the financial system. There was a fairy tale, for instance, that Fannie Mae and Freddie Mac were not backed by the U.S. government, and another that depositor discipline - the ability of depositors to penalize (discipline) banks for poor performance by withdrawing deposits-is healthy for the system. It turns out bank runs aren't so desirable. But perhaps the most outlandish myth dispelled is that there was no such thing as too big to fail, that the dispersal of risk across the global financial network meant the failure of any institution could be absorbed.

The reality is quite the opposite of course. Institutions can be too big to fail. Not only that, the failure of even small institutions can have unforeseen and damaging ripple effects in markets. This is why when people in the industry talk about too big to fail what they really mean is "too interconnected to fail." The global financial system, long heralded as resilient thanks to its interconnectivity, has been made brittle by it.

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