Posts Tagged ‘economic regulation’

Too Big

October 13, 2008

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?