Politicians today face many challenges that are unrewarding to tackle. No wonder many prefer to fulminate about too big to fail. Too big to fail, or TBTF, is a problem about which it is safe to fulminate, since neither politicians nor the public understand anything about it, and even less what to do about it.

Hence Sen. Carl Levin and others in Congress tirelessly flogging a trivial J.P. Morgan JPM -1.08% JPMorgan Chase & Co. U.S.: NYSE $56.80 -0.62 -1.08% March 14, 2014 4:03 pm Volume (Delayed 15m) : 18.48M AFTER HOURS $56.92 +0.12 +0.21% March 14, 2014 7:56 pm Volume (Delayed 15m): 160,195 P/E Ratio 13.03 Market Cap $215.09 Billion Dividend Yield 2.68% Rev. per Employee $410,415 03/14/14 FDIC Sues Banks Over Libor 03/14/14 Banks Reap $28.1 Million in Fe... 03/13/14 Social Media Transform Bank-Cu... More quote details and news » "whale" scandal. Hence the bizarre Eric Holder, our attorney general, suggesting in congressional testimony that he went easy on criminal prosecution of too-big-to-fail banks—and instead of being pilloried for his dereliction, being applauded for providing a new opportunity to deplore too-big-to-fail banks.

Of course, Mr. Holder was engaged in a form of fig leavery. In truth, big companies of any kind are seldom prosecuted. It has nothing to do with TBTF. Since the Arthur Andersen fiasco, it simply hasn't been politically viable to risk destroying a large business, putting thousands out of work, to win a criminal conviction that a court later would likely throw out.

In any case, TBTF hardly stops Mr. Holder from bringing criminal charges against individual bankers. But the deterrent there is the same—judges and juries simply haven't been supportive of attempts to stretch criminal law to cover greedy or foolish or unpopular behavior by business people.

U.S. Attorney General Eric Holder EPA

In fact, it would be useful to understand all the things the too-big-to-fail problem is not.

TBTF doesn't prevent the government from seizing even very large financial institutions, throwing out managements, wiping out shareholders: It did so in the case of Fannie, Freddie, AIG, Washington Mutual WMIH +5.35% WMI Holdings Corp. U.S.: OTC $3.35 +0.17 +5.35% March 14, 2014 3:59 pm Volume (Delayed 15m) : 451,162 P/E Ratio N/A Market Cap N/A Dividend Yield N/A Rev. per Employee N/A 01/27/14 Bank Analyst Mayo Criticizes D... 12/22/13 Paulson Sells Off Washington M... 12/17/13 J.P. Morgan Chase Sues FDIC Ov... More quote details and news » and others.

TBTF isn't somehow a special problem in a general financial crisis. In a general crisis, it doesn't matter whether banks are big or small, government isn't going to let them fail for want of liquidity. Indeed, it would be idiotic to do so. In the last crisis, taxpayers made a nice business out of relieving a bank panic that arose, circularly, from fear that taxpayers would not act to relieve a bank panic.

So what's the real TBTF problem? It resides in the government-provided incentives for banks to get inefficiently big in the first place. Put simply, in the absence of such incentives, the risk-averse funding that banks thrive on wouldn't be available to allow banks to create sprawling credit portfolios impossible for regulators or investors to assess.

Let it be said that there is no cheaper form of grace today than engaging in populist tirades against the big banks. That's why so many privileged Wall Streeters practice the art loudly. But if you sense between the lines a certain attachment of big government to big banks, which have only gotten bigger since the financial crisis, you aren't wrong. Modern governments, as long as they're assuming the risks of the financial system, find it convenient to have those risks concentrated in a few very large, very handy institutions.

A lean, clean solution, if anyone were really interested, would be to require banks to hold Treasury paper against their insured deposits. Disturbed would be the certainty of uninsured creditors that they would be bailed out to minimize the cost of bailing out insured depositors. Yes, the implications would be profound. Checking-account customers might have to begin paying for the services they consume rather than being a hidden beneficiary of the rents from deposit insurance. This is a feature not a bug.

Those who prefer chimerical solutions like higher capital requirements maintain that the business of banks would survive forcing banks to rely more on equity than debt to finance their activities. If so, then why assume equity markets wouldn't throw up new business models to finance small businesses and credit-worthy consumers if government-insured deposits were no longer available at all to underwrite such risks?

Everyone keeps saying a safer financial system would rely more on equity, less on debt. No more expeditious way exists than by reforming deposit insurance.

Which brings us to the crisis du jour. From afar, it would be easy to underestimate how thoroughly depositors in Spain and Italy understand that they are inside the magic circle of "core Europe" and have nothing to fear from the Cyprus precedent, in which insured bank depositors might be asked partly to pay for their own bailout. Call it an astute cynicism about which euro countries are worth saving and which aren't. Europe-wide bank runs aren't in the offing.

Still, Europeans are living dangerously. The time to worry about moral hazard is between financial crises, when policy makers have an opportunity to change the incentives of the financial system. No solution at all is teaching the markets to rely on government guarantees and then yanking those guarantees away in a crisis.

Unfortunately, the warning is relevant to the United States. Dodd-Frank not only didn't fix too big to fail. As time may show, the law may also have made it harder to respond rationally to the next financial crisis.