If an entity, whether a banking industry, an auto industry, a defense contractor, or any other capitalistic entity is “too big to fail,” --i.e. the government will be obliged to bail it out when it shows signs of failing because the failure will drag down the whole national economy–then it seems to me that the government has an obligation to monitor that entity’s size so it can be managed, to prevent an industry from becoming “too big to fail.” If it gets weak, the givernment can allow the weakest elements to fail while strengthening those that are run the most efficiently, allowing them buy up parts of the failed companies at bargain prices. It seems to me that failure is a necessary part of the capitalistic system.
Alternatively, any entity too big to fail must simply be nationalized, and run at a loss if necessary.
Great Britain went through this whole debate decades ago; indeed for many social, political or economic issues, a look at GB 50-70 years before present can be quite instructive. The former World’s Greatest Power faced the spectre of obsolete industries (i.e., coal and steel) whose failure would lead to massive unemployment, an irrevocable loss of global market share, and even the loss of nationally strategic capacity. The government turned first to protectionism and then nationalization, which failed stem GB’s decline as a world power. After things bottomed out in the 1970s, the Thatcher administration reversed the trend.
Here’s my personal solution for any company that’s too big to fail.
Let it fail.
This means considerable pain for a lot of people: the employees, the investors, and everybody with financial ties to the employees and investors. In the final analysis, it’s impossible for the government to prevent financial pain entirely. The question is, when does the government intervene and when does it not?
I can’t give an answer, but I can certainly say that letting the biggest companies simply help themselves too as much money as they want is a bad idea.
So instead of doing that, let them fail. Have the government offer some relief to the employees and investors. But not too much. The whole idea is that those employees and investors should learn not to become wholly dependent on a single, large company.
To me, the fundamental rule of capitalism is that people should be free to not support something if the costs do not outweigh the benefits. Nationalising a company and running it at a loss violates that rule just as much as forcing people to buy the company’s product.
“Too Big to Fail” makes little sense. What’s the difference between one giant company failing and a whole bunch of smaller ones failing? For example, all three big U.S. automakers are on the verge of bankruptcy. Any one of them is not too big to fail, but they are making the argument that all three will live and die together, along with an entire supply chain of smaller companies. Would it be any different if all of these companies were all under the umbrella of GigantoCorp? Not really.
No company is too big to fail. We’ve had entire industries fail. “Too big to fail” is just an excuse made by companies and by politicians eager to save jobs in their home districts at the expense of everyone else.
Accepting the notion that a company can be ‘too big to fail’ is a really bad idea, because it gives very large companies a competitive advantage over the smaller ones, thus biasing the economy towards the kinds of companies that would wind up being nationalized in a downturn, and then giving those companies an incentive to be more reckless than usual with their capital. So no matter how painful it is, we have to set a precedent that no matter how big you are, the government is not going to protect you. Keep your house in order, because if it starts burning, no one’s going to put it out for you.
Once they start talking about a company being “too big to fail,” the damage is already done. They should have worried about it being “too big to be run by idiots.”
Too big fail is definitely a fact in the finance industry because financial institutions do a lot of business with each and because confidence plays a huge role in the financial markets. If a big FI fails this damages other FI’s who were its counterparties which in turn may damage their counterparties and so on. A big failure will create a lot of uncertainty which sets off a downward spiral in the markets. All this has happened in the current crisis and other crises before. The answer is that the government has to set up safety net preventing a major failure and at the same time has to set up regulations so that banks and other FI’s don’t abuse that safety net. All this has been understood since at least Bagehot in the late 19th century though clearly after the current crisis regulators will need to strengthen regulation.
This doesn’t really apply to non-financial firms. General Motors and Ford don’t do a whole lot of business with each other and it’s not clear why one failure would adversely affect the other. I take it that there is some talk about damage to common supply chains and the like but presumably that would be balanced by the advantage of having a major competitor go down. However there is a good argument to help the auto industry for a couple of years and it has to do with timing; the US simply cannot afford a major industry to fall in the middle of what is perhaps the worst recession in 75 years. IOW it would have been all right to let GM et al fail in the middle of a boom but right now propping them up for a while is worth it purely as a recession fighting measure.
I’m with the “let it fail” side. A company fails for a reason - sometimes out of gross mismanagement, but most of the time because it’s simply not relevant/competitive anymore. Lumpy gives a great example with Britain’s coal industries. Keeping such businesses artificially afloat doesn’t magically change their obsolescence, and in the end it’s just a dead-end drain of public money.
Might as well forget about that particular industry and give some “free money” to the people most affected by its failure so that they can start new, more profitable enterprises, don’t you think ? If only to save some time and effort…
One difference is this: if, say, GM were ten companies instead of one, they wouldn’t all go bankrupt simultaneously (in fact, I would expect a few of them to have been managed in a way to remain viable). So the collateral damage to society would be spread out over several years and thus easier to absorb.
As I said in a thread on this topic a couple of weeks back, one sensible solution is to not allow any company to get “too big” if at all possible. It’s called regulation. We used to do it. Now we don’t, and we are seeing the consequences. Putting all of one’s eggs in one basket is still a stupid idea.
I would argue the other angle. That too much regulation and government interference is one of the reasons the companies got ‘too big’ in the first place.
Consolidation and oligopolies can happen via natural causes. But it’s also instructive to ask ‘Why?’ there are only a few, big institutions and see if governmental interference and regulation are perhaps a contributing cause (and not the solution). In other words, why aren’t there new entrants challenging the existing players and providing better value to consumers?
Banks, for example, require charters and capital requirements mandated by government just to exist. For smaller banks, the cost associated for smaller banks with dealing with regulators is enormous. It is not a trivial matter to set up a new bank despite all of the cries of poor service and high fees charged by existing banks.
As a result, fewer competitive entrants pop up in the banking industry to challenge the existing players. Every now and then a game-changer like PayPal comes along that is outside the existing boundaries and grows like a weed until it too, is subject to competition.
US auto makers got fat and happy - and postponed the day of reckoning for at least 10-15 years - by scooping up billions during the 1990s and early 2000’s selling SUVs. They had a lock on that market. Why was that? Did the government have anything to do with that? It might be instructive to check that.
There are also franchise laws and labor laws and environmental regulations and a host of other things mandated by government that make the cost way too high for a new entrant into the automotive industry. Much higher than it otherwise needs to be.
Unfortunately, I think most of the wind is blowing in the direction you suggest in your post. Instead of lowering barriers to entry in these industries to stimulate new competition and provide natural checks and balances on ‘too big to fail’ we seem to be angling for more government meddling. Which will make things worse.
You are not a politician, and therefore care more for the long-term health of the country than you do about maintaining 51% popularity through the next election.
I think many people do not realize that the money being given by the government to some companies is being taken from other companies and people. Some of those companies and people are on the edge and this will take them into bankruptcy… necessitating more aid to be supplied in taxes levied on the remaining players… It is a spiral leading to meltdown.
As has already been said, other countries tried this, including Britain, (not to mention Communist countries) and it failed. You cannot turn the time or the tide. Better to adapt and go along with it.
But that’s exactly the argument they are making - that if the big three go under, it will bring down an entire supply chain of hundreds of smaller companies, and cost the economy millions of jobs. In this case, they’re not saying that GM is too big to fail, or that Ford or Chrysler are. They’re trying to make the case that if these larger companies fail, they’ll take an entire domestic industry down with them.
You could make that same argument for, say, Amazon. If Amazon fails, all those companies that sell products mostly through Amazon will fail. All the distributors and shipping companies will see a big downturn in their sales. Yet Amazon itself isn’t ‘too big to fail’.
What we’re really talking about here is not saving one company because it’s so gigantic it can’t be allowed to fail - we’re talking about propping up an entire industry.
So you think there should be regulation aimed at simply preventing businesses from getting to be a certain size? Are you willing to give up the economies of scale we enjoy from such firms? What would you do about companies that need to be a certain size to provide certain products? I don’t think you’ll see too many mom and pop shops building offshore wind turbines or nuclear plants or aircraft carriers.
What does it mean to “fail”? These large companies don’t just disappear-- someone or some other company will buy them, and not every employee will be let go. So, yes, it’s comparable to looking at many smaller companies facing hard times. Some of those small companies will disappear, but not all of them. Some of GM will “disappear”, but not all of it. Same for their suppliers.
Some of those small companies like Visteon,Lear,Firestone,Delco and others are enormous. We are not just talking about neighborhood bars and restaurants,which would also go down. We are talking about suppliers with hundreds of thousands of employees.
Well, the bigger they are, the less likely they will “disappear” altogether.
I’m not arguing that people won’t lose jobs or companies won’t fail. I’m just saying the analogy of letting hundreds of smaller companies risk failure is perfectly valid when discussing the possibility of GM “failing”.
This needs to be repeated, often and loudly, accompanied by the (long) list of major American companies that have gone bankrupt and come out the other side.
Do we include financial companies and banks? If they fail they risk all their clients and depositors. Is that another tough luck thing. Some banks will survive .Is that ok too?