Would President Obama’s financial-industry tax be okay if Obama presented it as a sort of FDIC fund for high finance — that is, an industry-funded insurance pool into which “too big to fail” financial firms would pay to pre-fund their next bailout?

No. Confusion here is understandable. But applying the FDIC model to the broader financial system is unworkable.

A permanent bailout fund for the “too big to fail” financial industry would have to measure in the multiple trillions of dollars. For a “too big to fail” bailout fund to replace implicit and explicit government guarantees, it would have to be big enough to do credibly what the federal government has done over the past two (!) years.

TARP doesn’t even begin to cover the resources that taxpayers have devoted to banks and other financial firms since March 2008, when Washington took on the risk of some of Bear Stearns’ murkiest assets. The federal government essentially backstopped the financial industry after Lehman Brothers collapsed that September. Washington has backed everything from AIG’s derivatives obligations, to hundreds of billions of dollars’ worth of investments on Citigroup’s balance sheet, to money-market funds and the multi-billion-dollar bonds that banks floated in late 2008 and early 2009 to replace the money their private lenders had once provided.

The “too big to fail” bailout fund, then, would itself represent a systemic risk to the economy. Washington and Wall Street would have to invest the fund’s trillions of dollars in something. What? Treasury bonds? It then would be a new pool of cash from which the feds could borrow with no market surveillance. The global stock markets? At the hint of the next crisis, markets would panic at the understanding that the fund could have to sell those assets at fire-sale prices to cover its unknowable obligations, depressing similar asset prices worldwide. Mortgage bonds? Let’s not even go there.

No tax in the world would be onerous enough to cover the massive risk that is posed to the economy by a “too big to fail” financial system immune from free-market discipline.

The bailout fund would need its own bailout fund, because it would effectively be the biggest “too big to fail” financial entity in the world.

The FDIC, by contrast, is not a bank bailout fund. The FDIC is in some ways the opposite. In the Thirties, it was an elegant solution to one of the Depression’s biggest problems: how to let bad banks fail — yes, fail — with their bondholders and other lenders taking their losses, but at the same time protect small depositors from the impacts of such failures.

Until the 1980s, Washington allowed large lenders to commercial banks whose deposits exceeded FDIC guarantees to take their warranted financial hits. Washington stopped enforcing such market losses consistently in 1984. Look where that strategy got us (here).

We need not live with “too big to fail.” In fact, over the long term, we can’t live with it. Washington must properly regulate finance, as it did, more or less, from the Thirties ’til the Eighties.

If Washington does not do so, a future financial crisis will rupture the sovereign cocoon that finance currently enjoys. The U.S. government will not be able to borrow enough money on affordable terms to bail Wall Street’s lenders and other creditors out.

— Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal and a Chartered Financial Analyst (CFA) charterholder, is author of After the Fall: Saving Capitalism from Wall Street — and Washington.