If They’re Too Big To Fail, They’re Too Big Period

According to Treasury Secretary Hank Paulson, the biggest Wall Street banks now getting money from the government are just “too big to fail.” Fed Chairman Ben Bernanke uses a different euphemism – he calls them “systemically critical.” The point is that if any of them goes down, it could take the whole financial system with it. So we taxpayers have to keep them up.

We’re hearing the same argument elsewhere in Washington for saving General Motors. It’s just “too big to fail.” So Congress is considering a bailout that would keep GM afloat and sweeten a merger between GM and Chrysler.

Pardon me for asking, but if a company is too big to fail, maybe – just maybe – it’s too big, period.

We used to have public policies to prevent companies from getting too big. Does anyone remember antitrust laws? Somewhere along the line policymakers decided that antitrust would only be used where there was evidence a company had so much market power it could keep prices higher than otherwise.

We seem to have forgotten that the original purpose of antitrust law was also to prevent companies from becoming too powerful. Too powerful in that so many other companies depended on them, so many jobs turned on them, and so many consumers or investors or depositors needed them – that the economy as a whole would be endangered if they failed. Too powerful in that they could wield inordinate political influence – of a sort that might gain them extra favors from Washington.

Maybe the biggest irony today is that Washington policymakers who are funneling taxpayer dollars to these too-big-to-fail companies are simultaneously pushing them to consolidate into even bigger companies. They’ve prodded Bank of America to take over Merrill-Lynch and Countrywide. JP Morgan to acquire Washington Mutual and Bear Stearns. And now they’re urging General Motors to absorb Chrysler.

So we’re ending up with even bigger giants, with even more power over the economy and politics, subsidized by taxpayers, and guaranteed never to fail because they’re just … too big.


Originally published at Robert Reich’s Blog on Oct 21, 2008 and reproduced here with the author’s permission.

7 Responses to "If They’re Too Big To Fail, They’re Too Big Period"

  1. Guest   October 22, 2008 at 9:40 am

    Bretton Woods 2 is still well alive and kicking. Despite staggering budget deficits and a collapsing civilian industrial base, the US Dollar remains at a 1 year high versus the Euro. US Dollar hegemony for global trade remains intact with the petro-dollar “de facto” backed by US military projection power. In exchange for security protection of the respective regimes, Saudi Arabia and the Arab Gulf states continue to export the strategic commodity oil for sale exclusively in petro-dollars. So no matter how large the US trade and budget deficit, strong global demand of US petro-dollars continues unabated. Ironically, the worse the recessionary global economy, the greater the capital flight to US government Treasury bonds which increasingly misallocates global capital. The pool of US real savings has been long depleted, but the rest of the world is forced to continue to provide its savings to the US Economy.

  2. Duric Aljosa   October 22, 2008 at 2:11 pm

    To My Dear Friend, Mr Policeman: The Money IllusionOne hundred years ago today, it was so obvious: by issuing debt instead of a value, one can gain total control and dominance over the global political and economic system of governance. Global wealth is not so small morsel. It seems that among other improvements like the world bankruptcy, war destructions, poverty and ecological crisis, we leaved a total disaster behind us. So, our current situation is more than a 100% sure proof: you can’t protect and serve citizens, and respect the law at the same time.http://forum.cromalternativemoney.org/viewtopic.php?t=336

  3. gepay   October 22, 2008 at 6:06 pm

    I agree. The military thought that the old ATT was a national security threat so it was broken up even though it seemed to work pretty well at providing a telephone system that most every one could afford. But now AIG, JP Morgan Chase, Citibank, Goldman Sachs, etc can create financial debacles and they are to big to fail so we give them and other financials a trillion dollars rather the let the creative destruction of a free market work its way on failed operations. Obviously the real problem was not the mortgages failing to be paid as that problem could have been mostly fixed with much less money. what was important was to save the global financial system that wasn’t working. It’s being sort of saved but I don’t see it being fixed. Where are the new regulations? Where are the taxes on securities transactions and other new financial transaction that will pay for the ‘bound to happen failures’? Where is the Glass-Stiegal Act for the 21st century? Wasn’t that just recently repealed? Who is being penalized for castrating the financial regulators? Why aren’t they being fired for failing to do their jobs?But we know the answers – FIRE is running the train over a cliff amd Paulson thinks if we just put enough money into it it will fly. FIRE isn’t paying its share of taxes – It is taking too great a share of the money for doing a very poor job of what it is supposed to be doing – allocating the surplus wealth to the companies and people who would create even more wealth. FIRE has just been making money for itself – it doesn’t create wealth for the common good. It has itself become an inordinately large transaction cost in the financial system. It has become a greedy macroparasite on the social body.

  4. Edward Downe   October 23, 2008 at 7:02 am

    Great logic Bob but the counter argument that has to be dealt with is economies of scale. This is usually the argument put forward for oligopolies or monoplies. Do you want a small inefficient firm or a large (to big to fail) efficient. Can you give me the hole in this line of thought?

  5. Anonymous   November 1, 2008 at 10:54 pm

    What makes ‘too big to fail’ efficient?I see no ‘driving force’ or need for them to be’efficient’.