This is just an update on the last post concerning the subject “Too Big To Fail”, which can be found at:
I met with an x-business partner / friend, Jim, and an acquaintance, Will, to discuss the subject matter.
They suggested that I study the “think tank’s” matter on the subject. I concluded that there was not much on the subject and that economics in general was a primitive subject matter primarily driven by ideology with little historical reference and virtually no analytic basis or modeling, at least as relates to this subject.
From the limited historical information available on these “think tank” sites I did conclude that most corporate breakups did not result in a cost savings to the public, however they did generally appear to provide more stability to the surviving entities. Much of this data comes from the Wall Street Journal article found in a Brooking Institute search entitled: “If It Ain’t Broke, Don’t Break It Up” by Robert W. Crandall.
This means that breaking up very large corporations is problematic under the current legal structure, which places a premium on the net cost to the consumer.
Our group decided that the best place to break up these large troubled organizations was when they came to the government asking for “bail outs”. Here there was leverage and the breakups would not require dealing with the court system.
While, initially, there were no other people suggesting that we break up corporations, which posed a systemic risk, it now appears that a number of other people are starting to call for a break up of these companies and new rules for restraining the growth of these large companies.
Mike Lux, in the Huffington Post on March 12, 2009 writes: “I also agree with David Sirota that if these companies are too big to fail, then they are too big to exist: a proposition also agreed to by the populists and progressives of the late 1800s/early 1900s…Progressives of all eras have understood that corporations that grow too enormous threaten our economy and our democracy, and should be [b]roken up into smaller entities that can’t do so much damage when they are mismanaged”
Mary Anastasia O’Grady’s interview with Nobel Prize winning economist Gary Becker’s article in the Wall Street Journal March 21:
online.wsj.com/article/SB1237598 … #printMode
includes the best partial solution that I have found, since I have started looking into this problem.
After a few paragraphs of defending the historical importance of markets, and how we got to the point of where we are now, he writes:
“However that issue is resolved in the short run, there will remain the problem of institutions growing so big that a collapse risks taking down the whole system. To deal with the too big to fail problem in the long run, Mr Becker suggests increasing capital requirements for the financial institutions, as the size of the institution increases, “so they can’t have so much leverage.” This he says, “will discourage banks from getting too big” and “that’s fine. That’s what we want to do.”
The reason that I say this is a partial solution is that it apparently only addresses the banks. Further there are no specifics about the capital requirements.
One somewhat satisfying fact is that Citi group and AIG have in fact been breaking themselves up. Citi group has spun off Smith Barney to Morgan Stanley and it has stated that it wants to break itself up into a “good bank” and a “bad bank” and AIG’s CEO Liddy has been working at ways to spin off viable assets to gain cash. The problem of course is that the remaining entities are still too large and it is likely that an unbiased third party would break these companies up in such a way that there would not be a preferred offspring.
Notable Quotes:
Bernanke said to Paulson on September 17, after the New York Federal Reserve board authorized an $85 billion Loan on September 16 in return for about an 80% share of the company.
“We can’t keep doing this, both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation.”
Apparently Bernanke thought it might be appropriate to save our republic. Maybe a hero - who knows?
Alan Greenspan argues that the very existence of antitrust laws discourages businessmen from some activities that might be socially useful out of fear that their business actions will be determined illegal and dismantled by government. In his essay entitled Antitrust, he says:
“No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence, killed by the Sherman Act before they were born. No one can ever compute the price that all of us have paid for that Act which, by inducing less effective use of capital, has kept our standard of living lower than would otherwise have been possible.”
It is amazing to me that someone, so critical to the health of our economic system, should know so little about the mentality of the chief executive officers of our business community.
A final comment:
Based on my initial reading it is apparent to me that breaking up very large corporations will incur a cost. These large corporations enjoy an economy of scale and historically (despite the fact that they were generally ordered to divest in order to make a more competitive market) the net result of breaking them up was a net increase in cost to the consumer.
What needs to be determined is: what is that cost? However, the cost of a broken economy is virtually incalculable.