Last Friday, my colleague Ilan Moscovitz and I laid out why we think there's no excuse not to break big banks apart, ending "too big to fail." We specifically jabbed at JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon, refuting what we thought were unfounded defenses of the megabank culture.

That same day, by pure coincidence, Dimon penned an op-ed in the Washington Post, again defensively writing:

J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail ... a failed bank's shareholders should lose their value; unsecured creditors should be at risk and, if necessary, wiped out.

No kidding, kind sir. No one -- even the most hardcore defenders -- has ever suggested that shareholders shouldn't be punished. I couldn't care less about the shareholders of these companies. What I care about is collateral damage to the rest of the economy. That's what "too big to fail" is all about.

Everyone wants banks that screw up to fail. That's capitalism. But we don't want the resulting punishment of those who didn't screw up. That's just insanity.

When a normal bank fails, its shareholders and some creditors are out of luck. Those who willingly took the risk pay the price -- as they should. But when a megabank fails, you, me, and everyone else feels the pain, as the entire global economy spirals into freefall -- just like it did after Lehman Brothers failed. Those who were a million miles detached from the bank still paid a price.

A commenter to our article suggested that suppressing the scope of banks runs contrary to the free market. "I guess you don't believe in free enterprise, and ... neither does the federal government," the poster wrote. This couldn't be further from the truth.

Economic freedom relies on individual risk-taking. In our current financial system, the stupidity of a few reckless bankers and traders creates unintended collective risk-taking. It's as far from freedom as you can get. We want a system where bank failures wreak havoc on stakeholders of just that bank, and nothing else. You can still screw up; just leave me out of it. That's freedom, and we're big fans of it.

Charlie Munger, who has mastered the English language in amazing ways, said it best:

People really thought that giving a predatory class of people the ability to do whatever they wanted was free market enterprise. It wasn't. It was legalized armed robbery. And it was incredibly stupid.

Dimon, in his op-ed, suggests creating a regulatory structure able to handle the failure of megabanks, the same way the FDIC seizes and sells failed commercial banks. This sounds good in theory, but it's seriously flawed. A pillar of the FDIC system is the ability of larger, stronger, banks to purchase and absorb failed ones. When Washington Mutual failed last year, JPMorgan was right there to scoop it up. The transition was nearly flawless and pain-free. But this was only because JPMorgan was so large that it could digest WaMu's $307 billion in assets with relative ease.

What happens when JPMorgan, Bank of America (NYSE:BAC), or Citigroup (NYSE:C) -- each with about $2 trillion in assets, and gazillions of dollars in notional derivate exposure -- fails? There isn't a single private institution in this country that could absorb a balance sheet that large -- except the federal government, which is why we experienced last year's bailouts.

Having a system where huge banks can safely fail relies on the presence of huger banks to absorb them. But this scenario quickly spins out of control: For each megabank, there has to be a bigger megabank around to save it, and an even bigger one that can save that one. Ultimately, the solution to the problem becomes the problem.

Off the top of your head, you can think of at least a half-dozen "too big to fail" institutions. JPMorgan, Citigroup, B of A, Wells Fargo (NYSE:WFC), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), AIG (NYSE:AIG) ... maybe a few more. The failure of any one of these institutions would come down to two choices: Either put the entire economy on the brink of collapse, or be bailed out by the government. Either choice is both anti-free market and maddeningly unreasonable. That's what "too big to fail" means, and why it needs to end.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.