“Too big to fail” is too big to exist (or big enough to nationalize)

Posted by Josh Rosenau on November 25, 2008
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Armen Sedrakian makes a good point in a letter to the San Francisco Chronicle: Don’t let companies grow ‘too big to fail’:

Whatever happened to breaking up large corporations so they don’t dominate the market? Instead of the Treasury Department bailing out corporations, why doesn’t the antitrust division of the federal government break up corporations? At the very least, the bailouts should come with breakups rather than mergers to prevent these “too big to fail” problems in the future.

I can’t see an argument against this. That isn’t to say that an argument doesn’t exist, but it strikes me as a good basis for policy. Mergers already have to meet regulatory approval, and a company that’s too big to be allowed to operate in an unrestrained marketplace.
There’s another alternative, though. Some industries really are more efficient when run by a monopoly, and that benefits consumers (assuming honest management). Insurance gets cheaper the more people you get into the risk pool, and letter delivery is cheapest for everyone when one organization is responsible for delivering every letter to everyone’s door. The latter example is enshrined in the Constitution as a responsibility of the federal government for a reason. If a corporation must be allowed to grow to monopoly size in order to accomplish its goals, and if that corporation’s failure would put vital national interests at risk, maybe it should be run as a government monopoly, regulated and managed by elected officials to prevent abuses of monopoly power.

This analysis leads inevitably to the argument for a national single-payer health insurance system. But I’d say that insurance of that sort is a special case. I’m not (enough of) a socialist, and am not calling for widespread nationalization of industry.

However, this is absurd. In discussing plans to bail out Citigroup from its incompetent management, Steve Benen writes that:

The mismanaged company is worth $20.5 billion. It’s already received $25 billion from the TARP rescue plan, and the Treasury is poised to inject another $20 billion, on top of generous asset guarantees.

In other words, for the cost of the bailout, we could’ve bought Citigroup outright, along with AIG. And we currently own large stakes in the rest of Wall Street, and are poised to spend amounts of money approaching the market capitalization of GM to keep it in business.

If it’s really in the national interest to prevent these businesses from ever ceasing to exist, we should just nationalize them. If we won’t make that commitment, we should break them up into smaller entities, and let market competition make them stronger, and drive the bad businesses out. The monopolistic policies of the last 8 years (and of Rubinomics before that, and Reaganomics again before that) are coming home to roost.

The government has to do one of two things for the market. Either regulate things so that the marketplace actually does what it’s supposed to do (by blocking monopolistic power and other unfair or abusive practices) or else nationalize the monopolies so that they can be operated in the public interest. So long as we do neither, we’ll have more disasters like this down the road. And since the latter option is unlikely to lead to a better banking system (let alone to an improvement of the entire global economy/financial system), I’m going to hope we choose the former route.

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Comments

  1. #1 SteveN
    November 26, 2008

    I think you’re spot-on here. The monopolistic consolidations that have taken place have had negative effects for many years, but most people this has operated in the background. Now, the shocker: we taxpayers have to bail out these huge corporations because politicians allowed the corporations to become so huge. Yeck.

  2. #2 Roman Werpachowski
    November 27, 2008

    Neither AIG, Bear Stearns nor CitiBank (to name the famous examples) were monopolists in any sense of the word. “Too big too fail” doesn’t mean the market share here, it means that any of them, blowing up, would drag many other companies under.

  3. #3 Josh Rosenau
    November 28, 2008

    Remember that the laws regulating mergers and monopolistic actions are laws against actions “in restraint of trade.” Clearly, allowing Citi, et al. to grow “too big to fail” was an action that has, ultimately, acted in restraint of trade. Were they smaller, the failure of any one of them would not have dragged so many other companies under. The fact that Lehman’s collapse dragged down so much of the market indicates that they had an effective monopoly on at least some chunk of the marketplace in commercial debt. Similar analysis holds for AIG, Bear Stearns, Citi, etc. The marketplace wasn’t truly competitive because of the history of mergers and market avoidance by potential competitors, which allowed firms to grow “too big to fail.”

  4. #4 Dean Christie
    November 28, 2008

    More regulations? Just enforce the regulations that are in place. The Fed knew this stuff was out there, and yet they did nothing. (What does it say if they didn’t know this stuff was out there?) The Fed is recommending the bailouts, because they know they are responsible. This started ten years ago with the loose monetary policy. The yield curve went flat last year without the raising of short term interest rates! Lowering interest rates with have little effect.

    Removing toxic assets off the books of Citi, allows more certainty of pricing the company. Removing uncertainty frees up the whole market, lending, confidence, et cetera. Until someone comes up with a better solution, structured bailouts are what is at our disposal.

  5. #5 Roman Werpachowski
    November 28, 2008

    @John Rosenau

    “Remember that the laws regulating mergers and monopolistic actions are laws against actions “in restraint of trade.” Clearly, allowing Citi, et al. to grow “too big to fail” was an action that has, ultimately, acted in restraint of trade.”

    That is far-fetched. In what way did Citi act to restrain trade? What restrains trade is the lack of trust into counterparty delivering on its obligations.

    “Were they smaller, the failure of any one of them would not have dragged so many other companies under.”

    Was there a working exchange for CDS, these failures would not be such a problem, because all trades would have a central, very solid counterparty – the exchange. Currently we have an intermingled web of over-the-counter trades, which increases risk. Trade compression is being done now to reduce the outstanding notional of CDS trades, though.

    “The fact that Lehman’s collapse dragged down so much of the market indicates that they had an effective monopoly on at least some chunk of the marketplace in commercial debt.”

    They never had such a monopoly, period. Do not treat financial markets AD 2008 as if they were 100% rational.

    “The marketplace wasn’t truly competitive because of the history of mergers and market avoidance by potential competitors, which allowed firms to grow “too big to fail.”"

    What do you mean “market avoidance”? If these firms practiced the avoidance of the subprime market, it would be a lot better for all of us…