Too Big To Fail?

March 27, 2009

The premise that led to the bailouts and the TARP programs was that the companies the government was helping were “too big to fail”. Armed with that assumption, the Bush Administration led by Secretary Paulson began what has become an ongoing cycle of fear mongering, bailouts and scandals, costing the American Taxpayers literally trillions of dollars. The Obama Administration, aided and abetted by the Democrats in Congress has only compounded the problem with out of control spending and new taxes. These are debts and deficits that our children and grandchildren will have to work to repay.

But are these companies really too big to fail? If so, why were they allowed to get so big that their failure could so damage the nation’s economy?

Since we’re talking about “bailouts” let’s use the analogy of a sinking ship. Even if the ship is as large and expensive as an oil tanker, at some point, if it’s apparent that no amount of pumping (or bailing out) can save the ship, they let it sink and accept the loses.

That’s what has to happen to GM, Chrysler and any banks or insurance companies, including AIG, that can’t survive in the free market. They need to file for Chapter 11 and restructure themselves and their contracts. If they can’t then they have to file for Chapter 7. Will there be short-term pain? Yes, but compared to the long-term burden we’re placing on future generations, it’s a small price to pay and it’s the right thing to do. It’s the principled thing to do.

If in fact any of these companies is truly too big to fail then Congress is at fault for not using anti-trust laws to break up that company in the name of competition and national security.

I don’t believe any company is too big to fail in a capitalist, free market society. The government shouldn’t be in the business of deciding winners and losers in the United States of America.

Steven Rosenblum

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7 Responses to “Too Big To Fail?”

  1. Jason Moss said

    Good points, but “too big to fail” is a conclusion, not an assumption. Understanding the logical structure of arguments will make us better at debating the issues and properly arm us to win the battle for America’s future.

  2. American Confucius said

    Mr. Moss: you can use a conclusion as a premise, and if you do, a conclusion becomes a premise. The author’s syllogism is sound.

    Regarding the post, I think your ship analogy is inapt for banks because I question your assumption that continued pumping would never work. With the bank bailout, there’s a very good possibility that the bailout would work. And it wouldn’t require continuous pumping. The government buys up the troubled assets, in turn stabilizing the asset value of the banks. Once asset values are stabilized, withdrawals decrease and banks will no longer have to liquidate their assets at distressed prices. Banks survive, people’s savings and deposits remain intact, lending continues, economy slowly but surely improves, troubled assets become good, and the government sells these good assets for a profit later on. It’s a strategy that has been used to avert financial disaster going as far back as ancient Greece. (It is different from bailing out the Big 3 that have been failing for the past decade or more.) The reason why it wouldn’t work is because there’s just no popular will. This is different however from inevitable death.

    Personally, as a Goldwater conservative, I opposed TARP out of principle, not because I thought it had no chance of working. J. Schumpeter’s notion of creative destruction is a necessary evil of capitalism. But my greatest opposition with TARP was not the unprincipled use of taxpayer money, but moreso the clear unconstitutionality of the bail out under our Constitution’s non-delegation and separation of powers doctrines.

  3. Jason Moss said

    American Confucius: Awfully convenient logic, being able to assign words any definition you want. “Too big to fail” is a CONCLUSION, based probably on the ASSUMPTION, that the economy would not have been able to “handle” the fallout from AIG’s failure (or even, that the predicted fallout would actually occur). We can probably agree to disagree on this one.

    Where I agree with you is that the TARP bailout was not doomed to an automatic failure. The reason why this one was destined to fail is because it did not properly define what exactly “it worked” meant in any meaningful and measurable way. That something the Bush Administration cooked up did not have a well-defined end game should not surprise any of us.

  4. American Confucius said

    Mr. Moss: There’s nothing here to disagree with. You’re simply wrong if you’re suggesting that “too big to fail” is a conclusion that cannot be used as a premise, as you do by accusing me of erroneously assigning words any definition I want.

    Read through this syllogism carefully: 1) Killing innocent bystanders is evil. 2) Innocent bystanders were killed in Iraq. 3) Therefore, someone was doing something evil in Iraq. 4) When someone does something evil, he should be punished. 5) So, whoever killed innocent bystanders in Iraq should be punished.

    Elements 1 and 2 are premises supporting element 3, a conclusion. But fascinatingly, 3 is also a premise that, along with elements 1, 2, and 4, support the main conclusion, element 5.

    The author was suggesting that the gov’t used the element “too big to fail” as a premise for its main conclusion – that gov’t should bail out the companies.

    But I’ll throw you a bone here. I agree with you that it’s critical we understand the logical structure of arguments. Take heed.

  5. My vocabulary isn’t as well versed as you guys so let me just ask matter of factly.

    I don’t really care if the phrase is a “conclusion” or an “assumption” because neither definition will change the action that took place. Companies with bad business models who were losing money were deemed “too big to fail” and were then given our money to stay afloat without ever being forced to restrcuture their failing business models.

    Furthermore, this action has in essence eliminated the notion of “free market competition” because there isn’t a chance in hell that any new business or small business will be able to compete under these conditions. I mean think about it, let’s say your trying to start a new business or grow a small company. It’s already hard enough as it is to turn a profit. But here you are with a chance to “capitalize” on an opportunity to gain market share and revenue because your big competitors have become vulnerable and what happens? You get pushed back because they are bailed out. And not only are they bailed out but they are bailed out with your own tax money. That’s what us intellectuals call a “double whammy.”

    So my question is two fold: 1) How are you as an entrepreneur supposed to compete in the free market when our competitors are financed by the government? and 2) If what led to the banks having all of these toxic assets was because the taxpayers were no longer able to pay their mortgages and credit lines then how is buying up these toxic assets with those same taxpayer’s money going to now suddenly solve the problem?

    Oh, and another thing, last time I checked, in a free market society it’s the consumers who determine who succeeds and who fails by deciding what to buy, from who and how much of it. So if the consumers have decided (for various reasons and by various variables and factors) that they don’t want to buy a car right now, or insurance, or whatever then who the hell is the government to say that we are wrong and then force us to buy it via our tax dollars. I mean at the very least, if they are going to force me to buy GM then I should get a car out of the deal right?

  6. American Confucius said

    Mr Harvey: Your points are all well taken. But let me try to address your questions.

    1) Obviously, private industry cannot and should not be competing with the gov’t, and vice versa. This is the crux of the capitalism vs. socialism debate. However, I think with the banks, you need to understand that what we’re dealing with here is possibly an exception. It wasn’t like the bailed-out banks were hemorrhaging money for years like the Big 3. We’re dealing with a situation where a confluence of bad decisions (by banks, individual homeowners, politicians, etc) created the perfect storm, the housing bubble. So I think the bank situation can be dealt with outside the general rule that we should let the market clean house. Moreover, if you take a close look at the bailed-out banks, they make up the entire relevant industry – global-scale institutional investment banks. Small community banks were never competitors with these large institutional banks. In fact, these small community bank industry has grown since TARP. So I don’t think the bailouts stifled competition in the sense that you are concerned about. I share your concern however when it comes to bailing out the Big 3, which clearly cannot compete with its foreign rivals and thus the author’s analogy of the sinking ship applies. We cannot and should not keep a ship afloat if it’s been sinking for decades and it’s clear it will not stay afloat.

    2) To answer your second question, I quote my explanation above. “The government buys up the troubled assets, in turn stabilizing the asset value of the banks. Once asset values are stabilized, withdrawals decrease and banks will no longer have to liquidate their assets at distressed prices. Banks survive, people’s savings and deposits remain intact, lending continues, economy slowly but surely improves, troubled assets become good, and the government sells these good assets for a profit later on.” I understand there are some implicit assumptions here, but I think history shows they are reasonable. For instance, the main assumption here is that housing prices will elevate once it bottoms out. Despite the occasional housing bubbles and other blips, it’s clear that real estate values climb in excess of inflation over time. (As an aside, we know that TARP was pretty much a failure largely bc Paulson did not act as originally planned – to buy up the toxic assets, but instead took the 700 billion to buy stakes in the banks and buying up junk bonds. Thus, a private market for purchasing these toxic assets has developed. Private investors are paying pennies on the dollar and buying in bulk these toxic assets in anticipation that real estate values begin to climb.) My last point is that if you peruse CSPAN and watch arguments made by Republican House members on the floor who rightly voted against TARP, you will find very few if any who argue against it because they think it wouldn’t work. They argue against it out of principle and the danger of precedent.

    I think we’re all in agreement that TARP and any type of gov’t bailout is a bad idea. My point is that there’s a much stronger argument to be made for the bailout of large institutional investment banks than there is for other private industries.

  7. euandus said

    How about relying not only on regulations, but also considering Paul Volcker’s advice from experience: being too big is itself a problem that can and should be remedied? I’ve just posted on it at http://euandus3.wordpress.com/2009/10/25/bigger-banks-too-big-to-fail/

    See: http://www.msnbc.msn.com/id/33477077/ns/business-the_new_york_times/

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