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Thursday, September 18, 2008

Too Big to Fail = Too Big, Period.

I've been thinking about Doug Wiken's Tuesday commentary on "obesely fat corporations":

No financial, insurance, bond, or whatever should be allowed to grow so large that the failure of such an institution can allow legitimate belief that they must be saved by the government because they are too big to be allowed to fail [Doug Wiken, "Obesely Fat Corporations Too Big to Work or Be Worth Saving," Dakota Today, 2008.09.16].

Too big to fail: we've heard that phrase a lot this year. Every time we hear it, the next words are usually something like, "Get out your checkbooks, taxpayers!" Let's review:
  • $30 billion for Bear Stearns
  • $200 billion for Fannie Mae and Freddie Mac
  • $85 billion for AIG
I know, those amounts aren't upfront cash, just loans, money we expect to get back or else. But that's still over $300 billion of debt the federal government has stated a willingness to undertake, almost double the $163 billion deficit incurred in FY 2007. Even if assuming that financial risk is preferable to weathering a complete market freefall, $300 billion in extra debt is $300 billion that we can't commit to other projects, like catching Osama, building missile defense against North Korea, or expanding health coverage.

Businesses that become "too big to fail" impose an enormous cost on society. Perhaps it is time for Trust-Busting 2.0. In the old days, we busted up trusts or monopolies because their domination of the market tied the Invisible Hand, preventing normal market forces from working the way Adam Smith said they should. Now we find our hands tied by corporate giants that whimper "We're too big to fail!" They hold their size like a gun to our heads: we may withdraw our investments and insurance policies from these Wall Street behemoths, but they can then extract those funds from us via government intervention to prevent the economic chaos their failure would bring. So much for the free market.

We have reached the limits of capitalism—not the end, just the limits. Free market capitalism is a fine system for allocating resources. But it only works within certain well-regulated conditions. Healthy capitalism requires laws and law enforcement to make contracts stick and prevent mugging and fraud. It helps to have a uniform, regulated system of currency and credit.

And, just as in the general idea of a social contract, capitalism needs government to ensure than no one player becomes so powerful that it overwhelms the liberty of other players in the system. That applies to monopolies, whose power kills competition and transfers control over prices from the open market to a few conniving executive boards. It should also apply to companies like AIG and Freddie Mac, whose size and integration into the total economy has apparently exempted them from the normal rules of a capitalist system that would hardly notice the passing of any given firm on Madison's Main Street.

Growth is fine, but nature and Doug Wiken agree that at some point, growth becomes pathological. I want my two-year-old daughter to keep growing, but I'll be happy if she stops at a nice healthy 5'10", 150 pounds, just like her dad. If she reaches 10'5" and 510 pounds, we might have a problem.

Businesses can strive for growth, but at what point are they too big? We're seeing the answer: a firm is too big at the point where government intervention is necessary not only for the survival of the firm but also for the survival of the economy at large. The free market can't work in that situation.

So let's look at a new era of trust-busting: let's look at our largest corporations and ask what would happen if that corporation would collapse. If the answer is that our economy would come to a grinding halt, as appears to have been the case with Bear Stearns, Fannie Mae, Freddie Mac, and AIG, then government has an obligation to break that company up into smaller units that can still provide service and sink or swim without putting the taxpayers in peril of another bailout.

One way or the other, my free market friends, government has a role in the economy. Which would you prefer: government setting limits on growth and thus ensuring the continued operation of numerous independent firms, or government waiting until the imminent collapse of deregulated giants to step in and nationalize the financial sector?

See, I'm not so much of a socialist after all. ;-)

20 comments:

  1. I don't agree with you that large corporations are a bad thing. I do think that our bailing out of the corporations was and is a terrible thing. These organizations should have been allowed to fail.

    Would it have been painful for our economy? Yes.

    The problem is now no one will learn from their mistakes. We have had previous boom and bust cycles where very large corps failed. It was painful, but the general population learned after those cycles to be more careul.

    Right now, we have essentially said investing in the markets is no longer a major risk. If all hell breaks loose, the government will solve your problem.

    I think that big busts are necessary to remind everyone that giving anyone a dime of your money is a risk. People need to be afraid of investing so that they will do their homework. If a company is basically pulling a big pyramid scheme skeptical investors will root this out an remove the threat. Now, no one will feel compelled to do their homework.

    Personal responsibility? What?

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  2. No worries, Tony: I'm not calling for breaking every firm down to the size of Amert Construction. Large corporations do lots of good; they certainly build cars and solar panels better than I can. I also love your point about risk and responsibility. Let boneheads run their companies into the ground, no problem. But when those boneheads can take the entire economy down with them, doesn't society/gov't have a right/obligation to keep those boneheads from amassing such power in the first place?

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  3. What is the line in the sand as to what is "too big"? Exactly how much? What are the criteria, and who gets to decide what those criteria are?

    This is dangerous.

    It's also socialism.

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  4. You got this one right, Cory. "Too big to fail" equals "too big."

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  5. That's a really good question, mbk, about about how big is too big. But the Bush Administration is apparently able to draw that line in the sand and decide which companies are too big to fail.

    And you're right, sort of: there is socialism afoot... in the Bush Administration's potentially nationalizing the mortage lending and insurance industries by taking controlling interest in those companies. I'm proposing a more capitalist alternative, busting those companies up to preserve competition and room for failure. My suggestion doesn't put a single taxpayer dime into these companies. Who's the socialist: me or Secretary Paulson?

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  6. pennypincher9/18/2008 12:48 PM

    Next thing you know, the automakers are going to be given a bail out. I just hope that when things turn around, I get my dividends check. :-)

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  7. Comrade:

    Socialism is in the eye of the beholder.

    Pure communism looks good on paper. Did you ever read the Soviet Constitution?

    Bad in practice.

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  8. "there is socialism afoot... in the Bush Administration's potentially nationalizing the mortage lending and insurance industries by taking controlling interest in those companies. I'm proposing a more capitalist alternative, busting those companies up to preserve competition and room for failure. My suggestion doesn't put a single taxpayer dime into these companies."

    Cory, you're starting to sound like Teddy Roosevelt! We could sure use someone like him in a position of power right now.

    :-)

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  9. Bush Administration is writing new chapters for the book "Free Lunch for the very rich."

    Summing this up as "Too big to fail= Too big. Period" summed it up better than I did.

    My guess is that the housing bubble with irresponsible lenders and borrowers has artificially inflated the prices and monthly payments made by good lenders and paid by good borrowers.

    Bigness beyond a certain point only seems to benefit corporate officers get huge salaries and benefits without regard to success or failure or even competitiveness since too big means never having to say "cut prices" or increase efficiency until of course the whole mess collapses.

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  10. As a conservative, I'm against big government and big business. Right now we have big government subsidizing the failure of big business. Can it be that our politicians have realized that allowing big business to fail will mean that big government just may fail right along side of them? Inextricably linked, feeding off of the same carcass?

    I understand where Tony is coming from, and 'mustbekidding' voices the obvious rejoinder about who will decide what's too big. It's true that the bail out plans the government has imposed on these companies are running at loan shark rates, and it may even happen taht taxpayers make money in the long run - but that's no solace. Government has no business subsidizing failure - it's antithetical to capitalism.

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  11. Somebody is getting rich from all of this...

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  12. yeah you conservatives just keep changing your game plan and your beliefs. you are already socialists with comrade bush's latest move moving closer and closer to communism everyday. The founders of the republican party would be spinning in their graves over this. Lasse faire bunisess practices hands off until uncle sam has to bail your sorry asses out.
    another comment or question the president himself doesnt have the power to right an 80 billion dollar check nor really congress themselves but an unelected office granted nominated by the president and confirmed by congress has the power to just open up the government coffers and hand out 80 billion dollars.....sounds like one man has a little too much power....kind of scarry how much power one man yields.

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  13. Stan: I kinda like TR. He had enough of the rebel in him to run a third-party campaign -- my kind of guy!

    Douglas: Thanks for getting the philosophical ball rolling in my head!

    Shane: Welcome to the show! Indeed, liberals and conservatives can agree that "subsidizing failure" is a bad idea. But I think it's a stretch to think the Bush Administration is pouring $300B+ into these bailouts just because they think people might make some conceptual link between big business failing and big government failing. The way I heard it, there is a real crisis: if the mortgage lenders had gone under, credit worldwide would disappear, nobody (corporations, homebuyers, college students) could get a loan, and the global economy would stop dead. That's why I'm wondering if we have to impose some limit on the growth of companies before they get so big that they can cause such an economic meltdown all on their own. Which do you prefer, Shane: limits to preserve lots of small independent comanies operating in the free market, or a handful of giant corporations reaching crises where they must be nationalized to prevent an economic disaster that won't care which partisan flag you fly?

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  14. Anonymous - Glad you could find the time to tell us what Republicans think. Shouldn't you be hacking into Piper Palin's Nickoledeon account?

    Berger - Government limiting the growth of companies is giving it too much power, not to mention such a thing would undermine capitalism. The problem here is that government is big business, and whether its corruption or largess, the only way to preserve the integrity of the system is to stop allowing big business to use government against its competitors. When it comes to fostering small business, raising taxes and imposing other costs on it (as they're doing here in California) kills them - and only the large survive.

    The problem here is not business per se, but government bailing out business for fear of what failure would do to our economy, and the economies around the world. I say let them fail - the correction is needed and subsidizing risk only means more reckless decisions later on.

    Republicans are pissed about what the president is doing - and we should be, we're the last defense for a free market. Where are the Dems? Nancy Pelosi and Harry Reid have thrown in the towel, and as we expected, the rest of them are just pointing fingers. It would be great if we gathered together in outrage over Bush's over-reach, but it's the political season, and Dems would rather prop up Obama than fight against government intervention.

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  15. To bring the discussion back home, maybe this will be a more friendly season to try once again to derail the constant consolidation of the protein processing industry, i.e. Smithfield/Tyson whoever the next merger is or was. Too big to fail must be just as relevant when we're talking about our food chain as the money chain, right?

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  16. I agree, Anon: the argument is relevant to all areas of production, from finance to food. The free market depends on competition. That means no one company can get so big that it crowds out other entrants to the market.

    Shane, you say we have to "stop allowing big business to use government against its competitors." I couldn't agree more. But the problem with the financial crisis appears to be that the bail-out recipients have gotten so big that there are no competitors who could step in and provide the apparently essential services the bail-out recipients do.

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  17. Hey, keep it clean, kids.

    Anons leave these comments, which I feel compelled to edit for clean language:

    "sorry to put words into your republicans mouths but this is an outrage on every level from both parties. I am [mad] at both sides not only republicans but also democrats. This bailout is going to cost all of us people who live within our means to bail this b.s. Both parties can go straight to hell as far as I am concerned. Just another example of people not having to take responsibility for their actions. Also, another way to make a few people very very rich. to hell with this two party system."

    "I did not know that I would wake up and not be in Free Market America but the Land of Socialist America. George W. Bush the second truley socialist president of the U.S.A. Biggest Government Ever, More Layers to the Government, Secret Prisons, Socialist Bailouts of Businesses,..."

    I'll leave the viewpoints intact, but let's avoid certain phrases.

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  18. Something to remember also, the "Too Big to Fail" phrase should really be "Too big to let fail". No business is too big to fail by itself; but some are so big that only the government can prevent it.

    I heard yesterday that government intervention is necessary because trust of the businesses has been lost and the government can still be trusted.

    Seems a bit of irony in that the government should bail out businesses that can't be trusted.

    The bailouts should be financed by a federal sales tax on stocks and bonds. That might also slow the growth and bursting of financial bubbles created by speculation separated from facts.

    Rapid huge drops in stock prices suggests there is a problem that goes beyond the home mortgage market falling apart.

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  19. Wiken: our internationally known economic news commentator and analysist. I wanna be Wiken when I grow up.

    re: rapidly falling stocks - some of that comes from overseas markets (speculators, news, etc.) too, of which I have always been uneasy about.

    But I like that summary, "too big to fail" vs. "too big to let fail".

    What happens if (incredible stretch of the imagination here) Microsoft or any other monster corp starts rotting?

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  20. Cory, not exactly on topic but the morning’s news is very troubling:

    If you measure the depth of the crisis by the level of the stock market, the fed is stepping in way too early. The stock market is still higher than it was in 2001-5. It should not be rising above that level at the expense of debt assumed by future generations. It's a crime to take on this much more federal debt to rescue the bankers. The fix for this mess should include measures that will bring banking back home to the locals who understand their markets rather than perpetuating the existence of monsters who are "too big to let fail" and too big for the right hand to know what the left hand is doing. The hypocrisy of free market trickle down advocates who've been telling us for years to stay out of their business and perpetuating their free-wheeling environment by buying influence with their monstrous lobbying presence now telling us that the government has to step in to rescue them from their mistakes is the ultimate in societal betrayal. It is the biggest brick, added to the ones already hanging around our necks created by the Iraq war and the Bush legacy of debt created by vote buying tax cuts, that will guarantee that my kids' lives will be much more difficult than that of the previous two generations.

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