What would you think if you were to observe a doctor stuffing large trouts and chickens into the mouth of an obese patient out of fear that if he doesn’t get what he wants, he’ll panic and be very unhappy about his unfulfilled craving for ever greater amounts of food? You’d assume that doctor to be as sick as the patient he’s trying to treat. And such is the case with President Barack Obama and his too-big-to-fail plan. Instead of allowing creative destruction to slim down the financial structure of the nation into a more efficient and healthy form, he and his well-meaning cohorts of do-gooders are trying to create a system where the government takes over whenever there’s trouble in one of the bigger financial actors of the nation.
That’s just an extreme idea from the graveyard of state socialism that bankrupted many economies in the past. But with so many bailouts, such enormous amounts of dollars being tossed around everywhere to save anyone with deep pockets(!) from bankruptcy, the latest mental seizure of the government is only the natural stage of a in a long run of errors and mismanagement. In essence, the plan is making the bailout and government takeover mentality the central piece of the future regulatory system envisioned to prevent future crises. And the real problem is not even the moral hazard that so many people are worried about. The real trouble would come if the plan were to succeed. A financial system bound to a group of rotten giants which refuse to extend credit to anyone without connections to the government would be the real nightmare resulting from the administration’s proposed new framework of regulators.
To put it shortly, the problem with the Obama Plan is that “if a bank is too big to fail, it’s too big.”, as summarized in the words of Allan Meltzer, a respected Fed historian and economist at Carnegie Mellon University in Pittsburgh. In other words, if a bank is too big to fail, it should either be able to justify its existence by not failing by its own dynamism, or it should be allowed to be dismantled through market processes (i.e. bankruptcy) which punish the sluggish goliaths and reward the small, nimble, innovative firms that can create new ideas and take risks where necessary. By assuming the task of protecting these big firms, the administration is essentially placing a big barrier on the path of progress and prosperity that can only be achieved in a free market where everyone must take care of his own decisions. This is not even taking an ideological stance because human beings like autonomy in their decisions, and protect their possessions from the hands of others. Free markets allow each one to make choices and live with their consequences, just as it would be in a “natural” economy.
Of course, the government does not care that much about what happens to the big bosses, or their firms. If one of them goes down, there will be another wealthy patron sponsoring parties and politicians. What makes the government interfere in economic matters is the fear that if the process of creative destruction is allowed to run its course, the result will be a long period of electoral hatred towards the party that was running the economy at the time. As such, being on the side of a free market economy is self-defeating from a cost/benefit viewpoint for a government; we shouldn’t be surprised that the various forms of socialism are so popular these days.
So in a sense, the government is an interested party in the economics game. It’s against freedom, against progress, and against prosperity. It stands for fear, conservatism (even with a Democratic administration), and stagnation. People are afraid of bankruptcy, of unemployment, of and economic hardship, and when they feel so, they have a greater willingness to hand over the control of their lives to the government. Emotional decisions almost always lead to ruin, and there is no reason to think that this time the result will be different. Hard times are awaiting us on the economics front, and more so if the fans of a control economy get away with their childish and emotional plans.