Too Big


There’s a phrase we’ve been hearing a lot in the news lately, and not for the first time: “too big to fail.”  We heard it a few years ago when we — the taxpayers — had to bail out a huge hedge fund.  We heard it again recently about AIG and some others, whom the taxpayers are yet again having to bail out.  These companies screwed up hugely, but they don’t have to pay the price for it because they’re so large, their failure would bring down the total economy.

People argue about whose fault this was and what regulatory or anti-regulatory scheme might prevent these huge financial houses from getting themselves into another such mess in the future.  To me, that misses the point.  The fundamental problem here isn’t that these institutions failed; it’s that they were too big.

It strikes me as fundamentally undemocratic for any private entity to have so much influence on the economy that said entity’s survival must be guaranteed by the citizens.  It also strikes me as economically unsound and a threat to national security.

Therefore, I’d like to propose the following rule:  too big to fail = too big.

The purpose of anti-trust regulations is to prevent any business from gaining so much control over its market that it can engage in practices harmful to consumers and to the economy at large.  Why not apply the same logic to the present situation?  Let’s come up with some anti-bust regulations, the purpose of which is to prevent any one business entity from becoming so large that the economy could not continue to function within reasonable parameters if that entity went bust.

As far as I know, there currently is nothing in this country to prevent us getting into the same situation that Iceland and several European nations got into, where there are private financial institutions whose obligations are greater than the host nation’s entire GDP.  That strikes me as fundamentally and deeply unhealthy.  It looks like the European nations will survive it by virtue of being members of the EU, but Iceland is in serious deep doo-doo.

I’d like to hear opinions on whether there’s something fundamentally wrong with the notion of “too big to fail,” and whether or not regulation to prevent business entities from getting that big would be a good idea.  I know free-market conservatives hate this bailout, but they also hate regulation.  Where would they come down on something like this?

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13 Responses to “Too Big”

  1. Sandi Says:

    I would be on board with that. Capitalism has gotten completely out of control. It’s so far beyond manufacturing and the sale of goods and services. With all these derivatives and credit default swaps, the system is based on ephemeral pieces of paper that have very little meaning and end up relying on the psychology of banks and investors, who act like rats when they are afraid. I keep remembering that line from Pretty Woman (otherwise an awful movie), when she was asking what Richard Gere’s character did for a living (which was to buy companies and sell them off in pieces), and she said, “you don’t make anything, you don’t build anything.” Personally, I think we should go back to the barter system, but I’m a luddite that way. I also wish I could grow my own food. Maybe I should look into becoming Amish. 🙂

  2. Michael Lasley Says:

    An interesting idea. I think there are national security issues at stake, as you point out. Of course, Who decides what too big is is a problem. And then some would be concerned that a limit would discourage investment or ingenuity or whathaveyou. (And probably lots of other, more interesting questions…..I really don’t know enough to ask interesting questions about this.) But. I like your book proposal here and look forward to reading the rest of it.

  3. Eileen Says:

    I am so ignorant of all finance (Gene could attest to that), but wasn’t that what degregulation was suppose to do. It seems I read somewhere that it was suupose to be good for the little guy (a statement that should bring fear into every little guys heart) and save us all from the evil phone company. I don’t know if anyone has been paying attention but deregulation did not help the little guy, it raised his bills. and if you look closely the phone company is almost back to or mabe even bigger that what it was to begin with. And it has made competition in that market a joke….

    The thought was to do the same to the electric company….God help the little guy, might want to invest in some sticks to rub together….save us from our well intentioned public servants who promise the bank but then walk away from the table with all of our money….Thanks for letting me show my ignorance….

  4. urbino Says:

    Imagine my surprise late last night to happen upon none other than Federal Reserve Chairman Ben Bernanke giving a speech in which he identified 2 crucial structural issues that led to our current financial crisis. That’s right. You guessed it. One of them was that, in Ben’s words, “there are too many institutions that are ‘too big to fail.'”

    I don’t remember what the other one was, as I immediately got to work on my speech accepting the nomination to be the next Chairman of the Federal Reserve.

    (In completely unrelated news, if any of you think you might want a little bailout money thrown your way, now’s a good time to start quidding me for that quo.)

  5. Michael Lasley Says:

    Nice work, JU.

  6. urbino Says:

    Thanks. For my next trick, I’ll pull a victory in Iraq out of my hat. Then I’ll invent the Labor Theory of Value.

  7. Terry A. Says:

    And then could you get me one of them Toyota Tacoma pick-em-up trucks?

  8. Knights Who Say . . . « Hungry Hungry Hippos Says:

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  12. “The iniquities of men in high places.”* « The Edge of the American West Says:

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  13. Knights Who Say… « Hungry Hungry Hippos Says:

    […] should use modified anti-trust legislation to prevent banks from becoming too big to fail.  Sound familiar?  Go, Simon, […]

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