Maybe 'too big to fail' is just too big
Taxpayers are bailing out huge Wall Street banks because their collapse would spell doom for the financial system. But commentator Robert Reich thinks it's odd to also allow those companies to consolidate and get even bigger.
Robert Reich (Robert Reich)
More on The Economy, Wall Street, Commentary - Robert Reich, Robert Reich, Fed. Budget/Govt. Spending, America's Financial Crisis
TEXT OF COMMENTARY
Kai Ryssdal: Congress is in full oversight mode this week. There are hearings on everything from financial reforms to how this whole thing happened in the first place to what's going on with the bailout package.
Some banks are thinking about using their share of the bailout money to buy other banks. Bigger's usually better in the financial world. Except, says commentator Robert Reich, for what that means to the rest of us.
Robert Reich: 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 one 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. JPMorgan 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!
Ryssdal: Robert Reich teaches public policy at the University of California, Berkeley. His most recent book is called "Supercapitalism."
Comments
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From Bloomington, MN, 11/04/2008
Mr. Reich - Gov't is doing the same yet one more time. Allowing another two big companies to merge creating one giant one that might be "too big to fail" - Delta and NW that is - which will become largest arilines in the planet. As is two companies can't survive on their own with all the labor contracts and fuel costs crippleing the bottom line. Merging two of them will only make labor contracts more complex long term. What arilines are after is offering less and less choices so that consumer are forced to pay more.
From Olive Branch, MS, 10/30/2008
I had not been able to put my finger on one of the root causes of the failure and the subsequent forced bailout until this this story. Businesses must not be allowed to become so large that they can single-handedly drag down the entire economy.
Just to play devil's advocate, would the large number of regional and national financial entities holding bad debt have changed any if there were ten times the number of institutions with each holding one-tenth of the same debt?
From Louisville, KY, 10/26/2008
The government should not be propping up any corporations. We have thousands of banks and if one or ten fail, the others will pick up the slack. There is no systemic risk, only banks that made bad investments. It is wrong that taxpayer money is being given to some banks so that they can improve their business position. Mr. Paulson is rewarding his cronies at Goldman Sachs and other fat cats with our money. We have to borrow that money from China and pay interest forever.
Say no to the bailout and vote out of office every politician who supported it. Replace them with leaders who will balance our budget. Pay off the national debt and enjoy the prosperity that will bring.
From Abilene, TX, 10/24/2008
While I generally disagree with Mr. Reich's policy views, he's exactly right on this issue.
The only way that companies (banks or others) can possibly become this large is by becoming corporations or LLCs and thus gaining a number of benefits such as limited liability. Since the government is extending them a huge privilege, part of the cost of obtaining that protection should be "reasonable" regulation.
Of course, there will be disagreement about what is "reasonable", but I think we can all agree that regardless of the amount of regulation, in this case we had the wrong kind.
From Alexandria, VA, 10/23/2008
This makes sense. I wish we had another Teddy Roosevelt around.
From CA, 10/22/2008
Always good to hear from Robert Reich. So much wisdom, experience and common sense in every thing he says.
From Los Gatos, CA, 10/22/2008
Robert Reich is spot on. If a bank is too big to fail, then its too big, and can harm the country. That's exactly what's happened. Trim their size and influence, reduce their risk to the country, and provide some sensible oversight. They've proven, once again, that they cannot be trusted to supervise themselves. Next, big oil.
From Boston, MA, 10/22/2008
Reich is absolutely right. CEOs of financial institutions should be required to answer one simple question every year: "Is your company too big to fail?" If the answer is yes, the company should be broken up immediately. If the answer is no, then the company should not be permitted to ask for a bailout.
10/22/2008
Reich, antitrust should be used when a company becomes a monopoly. Chrysler, GM, Ford, and none of the banks hold monopoly in the U.S. I agree that 'too big to fail' is wrong. But how can you use antitrust on GM while there are always Toyota, Honda, and European carmakers? How can you use antitrust on JP Morgan and B of A, when there are Wells Fargo and other smaller regional, and community banks?
Marketplace, you need to hire a real economist.
From Pittsburgh, PA, 10/22/2008
How is a corporation different from a government-enforced cartel? If a corporation is essentially a cartel, then when the government creates a corporation, it needs to place strict limits on how large it can get.
From Pittsburgh, PA, 10/22/2008
How is a corporation different from a government-enforced cartel? If that analogy is correct, then when the government creates a corporation, it needs to place strict limits on how large it can get.
From Birmingham, AL, 10/22/2008
Finally someone is speaking with some common sense! It is completely unreasonable to think that even larger banks will be able to withstand future crises. WaMu was the largest bank failure ever; why would we think even larger banks could magically become immune to failure?
No, larger banks will simply require larger future bailouts. We seem to be moving toward corporatism.
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