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. ;-)