By Robert S. Siegel
The debate over businesses “Too Big To Fail,” is heating up, as talk show host Neal Boortz points out. It seems that we don’t understand that everything has a cost and therefore government can only give to one group by taking resources from someone else.
Michael Hiltzik from the LA Times Business section points out that TBTF could lead protected firms to take even greater risks knowing that those risks are covered by the government. He points out that many investors assumed the Feds would step in to bailout troubled institutions and that assumption helped get us into the trouble we are in today. Therefore a better approach to force financial institutions to manage their risks might be to guarantee that the government won’t interfere next time. Hiltzik also notes that bondholders may be the best insurance against future failures because they have the incentive to keep management in line.
Government control of businesses that it deems to be too big to fail sounds nice and safe to many people right now in light of the economic troubles this country is going through. I wish that everyone would calm down, step back, and think about this before it goes further. Too big to fail is dangerously close to Socialism. If people want a Socialist United States than we need to have that debate (I hope people don’t want that). If we think we can have more government control without evolving our economy into Socialism than we need to have that national discussion. However, we can not continue to hide from the fact that our government’s actions are heavily leaning toward democratic Socialism.
Again, I acknowledge that too big to fail sounds comforting at this time. If because of that need for comfort we allow our nation to slip into Socialism we will be trading one set of problems for another. Capitalism is painful but it also works.
Socialist states all over the world have failed, including the U.S.S.R, Cuba, and China. Further, the list of Socialist States reads like a who’s who of totalitarianism. Is it any wonder? If the government can control the means by which people put food on the table how hard is it for that government to justify control of the ideas of that society. See Venezuela.
Some will respond that the Europeans have a brand of Socialism that has succeed without totalitarianism. While European Socialism (call it democratic Socialism or Socialism lite) appears to be safe, it has managed to lock many groups into poverty, as NPR’s Morning Edition pointed out yesterday in a report about how unemployment and disparity are growing in Spain. Or read about Europe and its Muslims: A Gap of Trust from the Huffington Post.
What makes a business too big to fail? According to whom? How do we keep bias, self-interest, and corruption out of the decision?
Right now, the popular will of the people just might lead us into Socialism. Americans should realize that the Constitution establishes a wall protecting the rule of law from popular will. Popular will can be good. Popular will, because it can take on a dangerous urgency, can be very bad.
We need to proceed with great care, not urgency, when we proceed with Too Big to Fail and other government involvement in the economy or we will also need a category of business called, “Too regulated to succeed.”
{ 4 comments }
Very good point, as the Chrysler and (pending) GM bankruptcies are couched in “for the good of the country”. Nobody likes to see businesses fail; however, that’s the dirty side of capitalism that needs to work in order for it to succeed.
The amazing part of all of this, is that the taxpayers are going to get back zilch from the hundreds of billions being pumped into Fannie Mae and Freddie Mac. (And those bastards are giving out bonuses to their executives…what say you Barney Frank?). Are these 2 too big to fail? I can’t make that determination. But their underlying problems and what caused the mess don’t appear to be being addressed…I’ll leave that up to smarter people than me.
I’m not sure that reducing regulations would be helpful. Isn’t it the de-regulation that got us into the mortgage-backed securities problem? At this point we have a system that allowed people to take big risks that they didn’t understand with other people’s money. And they still have personal fortunes that would serve as plenty of incentive to do the same thing again–even if the companies don’t survive. Without regulation what’s to keep us from a perpetual boom and bust cycle?
I guess the libertarian argument would be to keep your money in your mattress if you don’t like it.
The problem came about through banker greed, but also through federal programs to make it far easier for people that would not normally qualify for mortgages to get mortgages. The bankers certainly took advantage of this, but ultimately this crises is the outcome of the legislature issuing what I have begun to call, BMRs, Buy My Reelections:
http://mindyourowndamnbusinesspolitics.com/wordpress/2009/05/10/let%e2%80%99s-rename-pork-spending-and-earmarks-buy-my-reelection-bmr/
Regulations are half of the problem. The other half is government subsidies, such as programs to help people qualify for loans that Robert mentions, and the Federal Reserve making cheap loans available to banks. And the value of regulations is that they can limit the damage of the subsidies, so deregulating while leaving the subsidies in place can make things worse. This is not an argument against deregulation, it is an argument for deregulation coordinated with removal of subsidies.