Economics is not a hard science, subject to controlled experiments. In their absence, we economists construct narratives to explain events, often involving key sound bites. Among the sound bites of the financial crisis are the following: “Separate the casino from the utility bank”;...

Banks cannot be made fail-safe. But they can be made safe to fail, so that the failure of a bank need not disrupt the economy at large nor pose cost to the taxpayer. In other words, banks can be made resolvable, and “too big to fail” can come to an end. To do so, the authorities, banks and...