Too big to fail? We'll see about that

The mess in the U.S. financial system is making me nostalgic for the dot-com collapse of 2000-2002.

That, too, was a cataclysmic bursting of an insane market bubble.

But, as we are painfully learning, it's one thing for the economy to lose Pets.com and a few hundred, or thousand, similar start-ups; it's another thing entirely to watch the market bet on the demise of, say, the nation's two largest providers of mortgage money.

The U.S. credit crunch turned 1 year old this month, and the situation clearly isn't improving. Major financial companies continue to reel from huge losses on defaulted home loans. Barring a dramatic turnaround in the economy, commercial real estate loans could become the next black hole -- although the banks will say, as they did initially with home loans, that commercial losses should be "manageable."

The unwinding of any market mania takes time, of course, and produces many casualties. That's the ugly side of capitalism at work.

But the casualties of the tech bubble mostly were little companies that weren't important in the greater economic scheme of things. Titans like Cisco Systems Inc. saw their stock market values plummet from 2000 to 2002, but there was never a danger that Cisco would go kaput.

By contrast, the enduring memory of the financial bubble's collapse will be the number of marquee companies either swept away or forced to shrink drastically to survive.

That issue was a key element of a speech that Federal Reserve Chairman Ben S. Bernanke delivered Friday. The central bank chief focused on how regulators might deal with "future systemic shocks" within the financial industry -- company failures or near-failures so large they could trigger chain reactions with potentially dire consequences.

We've already lived through several such systemic shocks this year. Countrywide Financial Corp., brokerage Bear Stearns Cos. and IndyMac Bancorp are history, the first two rescued just in the nick of time by larger rivals, the third seized by the government.

Now, shares of mortgage titans Fannie Mae and Freddie Mac trade for less than a fast-food lunch as the market bets that a government takeover is inevitable, if not imminent.

This week was another rumor-fueled ride on Wall Street. Fears of an impending failure of another major financial company were stoked by a speech early in the week by Kenneth Rogoff, a former chief economist at the International Monetary Fund and a historian of financial crises.