'Too Big to Fail' Should Not Exist

This recession has been characterized by the presence of companies that are so vast and influential that their failure actually endangers the American economy. The names of these companies, GM (GMGMQ.PK), Chrysler, AIG (AIG), Citibank (C), Bank of America (BAC), and so on, are all too familiar to us from their prominent place in news stories about economic disaster. In order to prevent systemic economic collapse, America has resorted to bailouts and political bankruptcy, essentially changing the "rules of the game" in order not to have these failing companies take our economy down with them. What is clear is that the benefits reaped by the economy in allowing the existence of these financial giants is nothing as compared to the damage caused by their collapse. Companies that are too big to fail should simply not be allowed to exist.

We should remember that capitalism is based on free market principles in which companies compete with each other. If one fails, other and presumably better companies take its place. Thus, the market evolves so as to better meet consumer demands. Companies fail in a free market economy because they are unable to compete with stronger business models. Moreover, they should be allowed to fail in these circumstances so that better business models can take their market share.

When, instead, a company that should fail is kept alive through tax payer money, it maintains the share meant for another better company and thus prevents innovation. What’s more, the tax payer becomes an investor in what is, by definition, a failing company. It goes without saying that it’s a bad idea to invest in companies that have flawed business models and/or incompetent management. This means that in keeping these companies alive, we are forcing the tax payer to make bad investments.

Lastly, once the government takes, through bailout, a prominent role in the administration of the company, we are introducing a set of decision makers into the mix who plainly have no idea how the business is run. What does Congress know about running banks, insurance firms, and car companies? Recently, Chrysler tried to close down franchises to increase its future viability after its bankruptcy. Basically, as a failing company, they were attempting to make themselves operational again. In trying to make itself a viable business again, Chrysler has had to face lawmakers who are overly concerned about the small business owners operating those franchises that need to be shut down for the company to survive. The bailouts have made the company accountable to people who don’t understand how a business like Chrysler needs to be run. What’s more, through bailout, not only are taxpayers investing in a failing business, but they are also investing in a business that, through management by Congress, is plagued by additional inefficiencies.

The sad truth is that sometimes businesses fail and that size really doesn’t insure success. We understand that Congress, essentially, had to do something with the various enormous companies that would have recently failed without aid from the government. Our economic system was in danger and collapse needed to be prevented. Now that disaster has been averted, however, Congress needs to spend less time focusing on things like the number of franchises the company can successfully allow, and more time preventing these gargantuan businesses from coming into existence in the first place. Right now, the U.S. maintains laws that prevent monopolies, why not have a similar process which prevents the creation of companies that are too big to be allowed to fail.

Comments

[lars:]

100% Agree'd. The larger issue here is that ~50% of Americans (those of us in the U.S.) have some how been blinded into thinking that our society needs government intervention and policy around it. We are rapidly drifting from our free-market principles, thus our freedom. Why should the "tax payer" be "forced" into doing anything by the government? That is what should be on the minds of all free-thinking citizens of this country. Socialist tactics will be the doom of this once great nation.

Jul 06 10:32 AM

[greedcanbgood:]

Hmmm....I agree with almost everything you say, except, "...why not have a similar process which prevents the creation of companies that are too big to be allowed to fail." How will you (or, more important the government) ever settle on a "to big to fail" definition? What industries should it(not) apply to? Why should we limit the size of organizations? If they fail, smaller organizations will be able to pick up the pieces at a significant discount and capitalisim will be alive and well. In addition, in today's global economy, you would really need all countries to comply and they won't. No, let free markets reign and let big companies fail if they have to.

Jul 06 10:33 AM

[darthbrooklyn:]

This article is only half correct in that these companies should have been allowed to fail. However, suggesting policies to limit the growth of a business is preposterous and goes completely against the values of our supposedly free market system. These companies that received bailouts are "Too failed to be big", not "Too big to fail"..

The only correct system for allowing companies to grow or fail is the free market. Government stepping in the way and changing rules on the fly only hinders this mechanism and at the same time, further deteriorates our image as a free competitive market..

Jul 06 10:37 AM

[BeachRider:]

A lot of people are surprised by American Bankruptcy law.
Many are comfortable with 'Chapter 7' style bankruptcy where a company is liquidated and the assets are distributed according to a hierarchy. Bankruptcy courts can elect for 'Chapter 11' style instead (more below). Individual bankruptcy has 'Chapter 7' and 'Chapter 13' (comparable, but not the same as 7 & 11 for corporations).
Writers often cite company documents that show a proposal for a specific bankruptcy, but a court/judge inspects the entire proposal before either accepting, rejecting or modifying the proposal. During the court's arbitration of the bankruptcy, the state takes possession of all the assets to redistribute them. Bush & Obama took special steps with banks and auto-manufacturers. They made special investments, using special classifications that matter when bankruptcy is before the court. They make those investments for political reasons (usually jobs), but hopefully set the terms of the investments so that the investment is not lost.
Because both Bush & Obama made these investments, it is not possible to ascribe them to solely-Republican or solely-Democratic interests. It is certainly expected that Obama will get back the people's money, within a reasonable period of time.
It looks like Chrysler will get out of court soon, BAC never went into bankruptcy and GM is also headed out of court. Once these resume their status as non-bankruptcy companies, the investment will be sold. I don't know where the story got started the the USA never intends to see its share of a new-GM or of a revitalized BAC. Obama will never be re-elected if this has been badly botched and a substantial part of the investment is lost.

Jul 06 11:10 AM

[Mad Hedge F...:]

"Too big the fail means it is too big to manage," said Warren Buffet.

Jul 06 11:25 AM

[User 158164:]

Obviously the author knows absolutely nothing about the auto business or how this situation came to pass.

I can hear the same arguments when the auto industry went through a massive consolidation in the 50's, When all the independent companies were gobbled up or run out by the big 2 (Chrysler and AMC were allowed to live to keep the regulators off of GM's backs) and anyone who didn't like it were told "it's market forces".

The problem is it's not "market forces", it is 50 years of self desstructive trade policies that make it more and more difficult to produce goods in this country.

We need policies that make American companies compedetive in the world market. Not protectionism, but a level playing field.

Jul 06 12:11 PM

[Andrew Fred...:]

Nothing will make a company stop using cryptic/dangerous products better than going out of business. It is self regulation at its best. If companies like AIG had failed because of their foray into credit-default swaps, it sure would have driven away others from such products and would have properly rewarded companies that handled these CD swaps correctly or ones that stayed away from something they didn't understand. This government interference pushes the limits of what it means to have a capitalist economy.

Jul 06 12:23 PM

[THR:]

I don't disagree. However, there are several other considerations:

- If we prevent a company from becoming too big to fail, aren't we interfering with the "free" markets?
- Preventing our companies from becoming too big to fail only works if the rest of the world follow suit.
A key problem in the market is that the markets, as presently structured, are not truly free markets. Size matters a lot in today's markets, which is wrong.
And you are very correct, the costs far outweigh the benefits of size.

Jul 06 12:32 PM

[Valley Boy:]

Enforcement of the federal anti-trust laws would be in order. We essentially are now saddled with supporting a banking cartel and an automobile cartel--- to what end, who knows.

Jul 06 01:14 PM

[slowdown:]

We don't have a free market - globalization took care of that the moment we opened our borders and allowed other countries to dump goods here.....whether it's a communist country that artificially controls wages of laborers or one that manipulates currencies and practices protectionism...the free market only exists here in the US and is at the expense of our jobs.


On Jul 06 10:32 AM lars wrote:

> 100% Agree'd. The larger issue here is that ~50% of Americans (those
> of us in the U.S.) have some how been blinded into thinking that
> our society needs government intervention and policy around it. We
> are rapidly drifting from our free-market principles, thus our freedom.
> Why should the "tax payer" be "forced" into doing anything by the
> government? That is what should be on the minds of all free-thinking
> citizens of this country. Socialist tactics will be the doom of this
> once great nation.

Jul 06 03:59 PM

[slowdown:]

Well..of course I have to disagree with the whole article. Every company listed is a US based company...does that mean that Toyota for example is not too big to fail? Seriously...Or is it okay that Toyota become the only automotive company in the world because the Bank of Japan subsidizes it. How does the US keep companies in other countries from becoming too big to fail? How does the US keep the failure of the Bank of Japan and Toyota from destroying our economy?

Jul 06 04:10 PM

[swaps:]

Free markets in a America is a myth. We have monopolists who are continuously propped up by government support.
A free market America would have let the money center banks go belly up so the free markets could cleanse themselves.
I recall it was the huge banks in Japan that prompted the U. S. to encourage U. S. banks to merge into unmanageable mega-bigness. Didn't Japan experience a still ongoing economic crush despite having megabanks too?
And now free markets simply means U. S. producers and manufacturers should shut down so companies in second and third world labor markets can become the new monopolists.
It was partly the banks that encouraged the huge concentrations in industry after industry because in their thinking it is easier to make one mega loan - and watch it (fail) - than make many smaller loans. But the megalenders have found out the borrowers are now so big the bank now works for them. Think about it. The borrowers can and do just liquidate and walk away.
The banks have to figure out how to get their huge megaloans back. How to get the mega derivatives unwound. How to make one huge loan to a lot of foreign low wage workers they wanted brought in.
When the banks started favoring a few businesses in each industry in order to consolidate them for lending efficiency they started down the free market path that leads to corporate welfare.

Jul 07 11:37 AM

[biomedlives:]

Until American wages are closer to those in developing nations, it will continue to be difficult for manufacturing in the US to be competitive in world markets.


On Jul 06 12:11 PM User 158164 wrote:

> Obviously the author knows absolutely nothing about the auto business
> or how this situation came to pass.
>
> I can hear the same arguments when the auto industry went through
> a massive consolidation in the 50's, When all the independent companies
> were gobbled up or run out by the big 2 (Chrysler and AMC were allowed
> to live to keep the regulators off of GM's backs) and anyone who
> didn't like it were told "it's market forces".
>
> The problem is it's not "market forces", it is 50 years of self desstructive
> trade policies that make it more and more difficult to produce goods
> in this country.
>
> We need policies that make American companies compedetive in the
> world market. Not protectionism, but a level playing field.

Jul 07 11:52 AM

[Perry B:]

Laws change slowly Obama is currently working on correcting the anti trust laws that have been perverted to serve the " To big to fail companies". Will he be able to get enough support to make this happen? Considering the depth of corruption in our legislative branch of government? God only knows. In my opinion we have no free enterprise in America under the current anti trust laws. Only bully monopolies that ruin the chances of any small, independent. fundamentally sound company from competing against the current monopolies, failing subsidiaries. The media needs to refocus on the importance of breaking up these monopolies instead of saying we are becoming communists or socialists or fascists. The facts are we have no free enterprise under the current anti trust laws. Our country cannot move forward until free enterprise is restored. Good article.

Jul 07 01:08 PM

[MudEngineer:]

You actually believe that Obama made things better by what he did by interfere-ing in the Chrysler and GM bankruptcies? I have been a loyal Chrysler product buyer for over 35 years, but after this farce orchestrated by Obama wherein the UAW got 55% of the company and the bondholders got screwed, I will never purchase another Chrysler product again.

I will not be a party to rewarding those UAW Hogs feeding at the trough of the American Taxpayers. If and when they give (not sell) at least 35% of the company to the Taxpayers, I might reconsider my future purchase options. Until that happens, let the UAW at Chrysler starve! Boycott Chrysler products and the UAW Hogs!


On Jul 07 01:08 PM Perry B wrote:

> Laws change slowly Obama is currently working on correcting the anti
> trust laws that have been perverted to serve the " To big to fail
> companies". Will he be able to get enough support to make this happen?
> Considering the depth of corruption in our legislative branch of
> government? God only knows. In my opinion we have no free enterprise
> in America under the current anti trust laws. Only bully monopolies
> that ruin the chances of any small, independent. fundamentally sound
> company from competing against the current monopolies, failing subsidiaries.
> The media needs to refocus on the importance of breaking up these
> monopolies instead of saying we are becoming communists or socialists
> or fascists. The facts are we have no free enterprise under the current
> anti trust laws. Our country cannot move forward until free enterprise
> is restored. Good article.

Jul 08 08:56 PM