With all these bailouts (banks, AIG, Bear Stearns, and, coming soon, autos!) it’s a wonder how we got to this point. Well, I found an interesting statistic.
Taken from the history of the S&P 500’s top components and GDP data we find out that the growth rate of the largest companies (AIG and Citi (NYSE:C) were part of this group in 2006) has outpaced our economy by 6% annually. Stated another way, the market cap of the top 10 components of the S&P 500 has grown by, on average, 9.4% per year and the economy, as measured by GDP, has grown by around 3% per year. This data covers 27 years.
Now, I’m no math genius, but when you have a subset of the economy growing much faster than the economy, it points to a super-concentration of risk. Especially when the system is so inter-connected, perhaps the issue is that some companies became too big, ya think?
This sort of growth is a perfectly natural corollary to pay issues and other things. If I’m an executive, and I make money based on earnings, and I get paid in stock, then why not buy my competitors to enlarge my company and increase earnings, eliminate competition to expand margins and create more room for error in execution of business strategies, and use my newly-created larger company to invest even more in the business lines that are producing the best quarterly results? Well, I would! And they did.
But, if we are looking for stability in the system, and we really want the market to work wonders, then we want something different. We want lots of smaller, nimble competing businesses that are constantly keeping margins low and product innovations high.
We do not want two or three super-sized businesses that are stable in their market share and merely looking to increase earnings through incremental improvements, and not innovation (GM? Ford (NYSE:F)? Chrysler? I’m looking at you). We don’t want an entire industry to consolidate to the point where they all start following each others' innovations so that they can all go down with the ship if any one of them is wrong (Investment banks? Bear? Lehman (LEH)? I’m looking at you now).
And, as a taxpayer, I wouldn’t want a decline in the economy, when all businesses suffer, to jeopardize a set of companies that are too big to fail and not drag the economic state down with them–I would have to bail them out when I’m hurting most.
Those of you that are math geniuses know what comes next … “=><=” (or “⊥”).
I guess we know who won out now. Maybe our leaders should figure out how to prevent this kind of consolidation. They do it with banks (obviously they took a very narrow view there).