Imagine if instead of merging more and more banks together, we had broken them apart and forced them to compete in a genuine manner. Or, alternatively, imagine if we had never placed ourselves in a position in which so many institutions were too big to fail. The bailouts might have been unnecessary.
I wouldn’t say “might.” The merits of the idea is that by definition firms would not be allowed to reach a size such that bailing them out in case of failure was necessary. You would lose economies of scale that are presumably efficiency enhancing (although I’d like someone to explain to me exactly what this efficiency has gotten us) but you could make this up on the back end by regulating the firms less stringently, since it’s the potential need for bailing out that drives the need for regulations.
Now perhaps there’s no feasible way to design and implement such a rule. Certainly I couldn’t design and implement one. But I wouldn’t mind seeing someone who has the right kind of background — someone like Elliot Spitzer, perhaps — take a shot at saying in more detail what this would look like and how it could be implemented.