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Thursday, November 13, 2008

The New Economic Paradigm: Too Big To Fail

Let's review for a minute. First, the Federal government wanted a bailout of banks and financial institutions. It was massive, $700 billion, however without it, they told us, the entire world financial structure would collapse. Next many of these same politicians talked about a massive bailout for distressed borrowers. Without this bailout, they told us, the real estate market would collapse. Now, these same politicians are demanding a bailout for the automakers. The automakers, these same politicians tell us, need saving because automakers, their suppliers, retailers, etc. make up about one in ten jobs in America.

What we have created with this bailout palooza is a culture of too big to fail. It appears that no one, no thing, and no industry can fail without the entire economy collapsing. Failure is a fundamental component of capitalism. When someone fails they learn from that mistake. Others learn from the same mistake. If waste, excess, and incompetence isn't allowed to fail, then that is exactly what we will breed. Instead, bailout palooza has bred a culture of vitality. All anyone needs to do is convince a politician or bureaucrat that their failure would be too much of a hit onto the economy, and suddenly, they will be next in line for a government handout.

Think about it. By this measure, we all better hope that Wal Mart never fails. The hit to our economy from that giant failing would be far too great to fail. This retailer is the number one buyer of goods of thousands of companies. They employ about two million employees worldwide. Clearly, if it ever came to it, Wal Mart would be too big to fail.

In fact, by the philosophy the federal government is now using, nearly every company in the world is frankly too big to fail. Our structure is extremely vertical and horizontal. What this means is that most companies have several customers, suppliers, and business partners. The failure of most companies would set off a chain reaction to each and hurt all their businesses. As such, by the standard used now, anyone with a health horizontal and vertical business structure should be deemed too big to fail.

Of course, this philosophy dismisses a lot of economic reality. When companies fail, they either restructure through bankruptcy or they get sold off. Even if the big three were to fail, it isn't as though one tenth of our jobs would go away. Don't get me wrong, the hit to our economy would be devastating. The problem is that if we save every company who's failure would "devastate" our economy, that means most companies would have to be saved. It's never a good thing when a company fails, and it's even worse when a big company does. That is the nature of the capitalistic system.

Those that insist that everyone needs to be saved, frankly, have no confidence in capitalism itself. Capitalism works in that every person's failure is another person's opportunity. If the automakers failed, the foreign automakers would buy their productive assets and let the unproductive ones disintegrate. Most of the folks that work in the productive parts would keep their jobs. The rest would lose their jobs. Now, it's certainly admirable and compassionate to try and make sure everyone keeps their job. Unfortunately, it is extremely corrosive to make sure this happens by propping up poorly run companies in order to do it. Had we had this mentality at the end of the nineteenth century, blacksmiths everywhere would have been getting bailouts.

Many a giant has come and gone throughout our capitalistic history: Texas Instruments, Commodore, RCA, etc. Our economy has survived giants failing. It can survive more gaints failing. What our economy can't survive is a culture in which most companies are deemed too bit to fail. In that case, companies will take unnecessary risk knowing that if the risk blows up there will be government funds at the end. This bailout palooza is creating exactly such a culture. This is not capitalism, and the effects will be devastating, much more devastating than the failure of the automakers.

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