Is Too Big to Fail a Flawed Concept in a Free Market?

[Ivan Seeking]

How does one quantify the claim that a company is so large that its failure would take the national economy down with it?

And here is a bit of a paradox. There is no such a thing as "too big to fail" in a free market. But from a practical point of view, we can't have the entire economy subject to the whims of anyone corporate entity, so it must be that too big to fail means too big to exist. But any action to limit the size of companies also suggests that we no longer have a free market. Therefore, there can be no free market.

It seems to me that puritan free-market policies are not in the public interest - it is a dead concept. While I still favor maintaining as free a market as possible, I now wonder why I was ever such a fan of the idea. Puritan free-market principles now seem about as logical to me as the notion of passing on penicillin in order to allow a bacterial infection to run its course, out of principle. That is to say that I see no evidence that a free market ultimately acts in the public interest any more than does a weather system, a bacterial infection, or any complex and self-serving, or chaotic system.

 

[Proton Soup]

yes, it hasn't been an honest-to-dog free market economy here for mucho time. as soon as a technology crosses that threshold from luxury to something we depend on, we call it a utility and regulate it. so things like energy supply, water supply, and telecommunications are too big to fail. and since we do so little with cash anymore, banks are too big to fail. the problem is, if something is too big to fail, then you can't let it be totally free anymore, you've got to have tighter regulations and actually enforce them. ironically, it seems that both regulation and deregulation may have led to the collapse here.

 

[drankin]

What do you have if you don't have a free market? I'm just curious because I hear so many say that a "free" market doesn't work. A true free market is no good as it tends to allow monopolization of industries. There must be a middle road that allows a basic free market but discourages a corporation to be too large that the shear size threatens the entire economy. Maybe a corporate size limit? At a particular size it is required to split in order to create competition? What would have happened to microsoft if there were such a rule? Would we have a better OS? ...

 

[Astronuc]

It seems to me that puritan free-market policies are not in the public interest - it is a dead concept. While I still favor maintaining as free a market as possible, I now wonder why I was ever such a fan of the idea. Puritan free-market principles now seem about as logical to me as the notion of passing on penicillin in order to allow a bacterial infection to run its course, out of principle. That is to say that I see no evidence that a free market ultimately acts in the public interest any more than does a weather system, a bacterial infection, or any complex and self-serving, or chaotic system.

I think one is referring to the 'Chicago School' of economic theory: lower taxes, free markets (regulations by the participants - buyers and sellers), and minimal (or no) intervention or regulation by the government.

For free markets to truly work (in the interest of the community or society), the participants must be ethical, i.e. honest in their dealing, free of misrepresentation, . . . .

It would appear that some institutions or sectors become too big that they must fail, especially when engaging in unethical practices or false premises.

Chicago school of economics
http://en.wikipedia.org/wiki/Chicago_school_(economics )

RIP Chicago School of Economics: 1976-2008
http://www.ritholtz.com/blog/2008/12/chicago-repudiation/

Friedman Would Be Roiled as Chicago Disciples Rue Repudiation
http://www.bloomberg.com/apps/news?pid=20601109&sid=a3GVhIHGyWRM&

 

[Proton Soup]

What do you have if you don't have a free market? I'm just curious because I hear so many say that a "free" market doesn't work. A true free market is no good as it tends to allow monopolization of industries. There must be a middle road that allows a basic free market but discourages a corporation to be too large that the shear size threatens the entire economy. Maybe a corporate size limit? At a particular size it is required to split in order to create competition? What would have happened to microsoft if there were such a rule? Would we have a better OS? ...

it used to be pretty common to break up companies when they got too big. trust-busting.

 

[Ivan Seeking]

it used to be pretty common to break up companies when they got too big. trust-busting.

But now, instead of monopolies, we are talking about the death of the economy.

 

[Al68]

~ If Rush [Limbaugh] wants Obama to fail, then he wants America to fail. So Rush and Bin Laden are on the same page. - Bill Maher

Dude, I would seriously change that quote. Big time faulty logic.

Of course a lack of understanding of free market economics doesn't help either.

 

[Proton Soup]

Dude, I would seriously change that quote. Big time faulty logic.

Of course a lack of understanding of free market economics doesn't help either.

so what's this i hear about Bill Maher bangin' Ann Coulter? i think Aaron McGruder's got the right idea about these people. it's all theatre.

 

[OmCheeto]

Originally Posted by Ivan Seeking View Post

~ If Rush [Limbaugh] wants Obama to fail, then he wants America to fail. So Rush and Bin Laden are on the same page. - Bill Maher

Dude, I would seriously change that quote. Big time faulty logic.

Of course a lack of understanding of free market economics doesn't help either.

The quote seems very logical to me. I was going to steal it, but my signature section is full at the moment.

And who is it you are implying doesn't understand free market economics? Rush, Obama, America, Maher, Ivan, or yourself?
Or are you practicing a form of self-deprecating humor?
Your 3rd sentence do not follow logically from the first two, and I thought you might be making a joke about logic by being illogical.

 

[Al68]

The quote seems very logical to me. I was going to steal it, but my signature section is full at the moment.

And who is it you are implying doesn't understand free market economics? Rush, Obama, America, Maher, Ivan, or yourself?
Or are you practicing a form of self-deprecating humor?
Your 3rd sentence do not follow logically from the first two, and I thought you might be making a joke about logic by being illogical.

Well, if you assume that Rush equates a failure of Obama's agenda with a failure of America, then the logic is fine. Of course then it's a bad assumption. Even if Maher equates the two, his conclusion is based on Rush equating them.

And I didn't intend my third sentence to follow from my first two. It was a separate paragraph.

 

[Janus]

Well, if you assume that Rush equates a failure of Obama's agenda with a failure of America, then the logic is fine. Of course then it's a bad assumption. Even if Maher equates the two, his conclusion is based on Rush equating them.

And I didn't intend my third sentence to follow from my first two. It was a separate paragraph.

From reading the statement from which Rush's quote was taken, I'd say that Maher's take on it is quite accurate. At one point Rush lists a number of items that he says Obama wants to implement , and then say that he hopes that they don't succeed, because he (Rush) doesn't want these things to happen. It is important to note that he does not say that he doesn't want Obama to succeed in implement these items, nor that he doesn't think that they will suceed, but that that he doesn't want them to succeed.

Now the aim of many of these items are to strengthen the economy. For them to fail, means a continued failing economy. So it is very clear that Rush is implying that he'd rather have a failed economy than an economy strengthened by something that goes against his ideology. IOW, if the country can't succeed on his terms, he doesn't want it to succeed at all.

 

[mheslep]

...Now the aim of many of these items are to strengthen the economy. For them to fail, means a continued failing economy.

That's a fallacy, a rather obvious one. 1. The statement of of aim or intent may be subterfuge. There may be other agenda's, and in the case of many congressional representatives I believe there are. 2. The aim may be well intended, but mistaken or flawed.

 

[mheslep]

I believe that America's free market has been the engine of America's great progress. It's created a prosperity that is the envy of the world. It's led to a standard of living unmatched in history. And it has provided great rewards to the innovators and risk-takers who have made America a beacon for science, and technology, and discovery.

Barack Obama
http://www.barackobama.com/2007/09/17/remarks_of_senator_barack_obam_24.php

 

[Al68]

From reading the statement from which Rush's quote was taken, I'd say that Maher's take on it is quite accurate. At one point Rush lists a number of items that he says Obama wants to implement , and then say that he hopes that they don't succeed, because he (Rush) doesn't want these things to happen. It is important to note that he does not say that he doesn't want Obama to succeed in implement these items, nor that he doesn't think that they will suceed, but that that he doesn't want them to succeed.

Now the aim of many of these items are to strengthen the economy. For them to fail, means a continued failing economy. So it is very clear that Rush is implying that he'd rather have a failed economy than an economy strengthened by something that goes against his ideology. IOW, if the country can't succeed on his terms, he doesn't want it to succeed at all.

I have to assume you can't really believe that. In any case it's way too absurd to discuss.

 

[Ivan Seeking]

In other words, you admit that you have no response and Rush is essentially un-American. He cares more about his ideology than he does the country.

 

[Ivan Seeking]

In a nutshell, I think we see the reason for the mess we're in right now - ideologs have taken us to the brink of disaster. We can't live by the motto, "Free markets and damn the rest!".

 

[mheslep]

...

It would appear that some institutions or sectors become too big that they must fail,

Thus the US government must fail?

 

[Al68]

In a nutshell, I think we see the reason for the mess we're in right now - ideologs have taken us to the brink of disaster. We can't live by the motto, "Free markets and damn the rest!".

Uh, is that a joke?

 

[Proton Soup]

democrats want republicans to fail. republicans want democrats to fail. if you think otherwise, you're a pretty dim bulb.

 

[Astronuc]

Thus the US government must fail?

Well looking at the number of investors harmed over the last two or three or four decades (including the current fiasco), and the pension funds and corporate treasuries that were cleaned out, I'd say the US government has failed in its role to regulate the economy, protect employees and investors. I'll have to provide some examples.

Looking at 9/11/01, the US government failed to protect the nation against attack, part of which was due to sloppy airport security, and part due lack of follow up on al Qaida.

There was a recent failure to prevent contaminated food entering the domestic food supply.

 

[Ivan Seeking]

democrats want republicans to fail. republicans want democrats to fail. if you think otherwise, you're a pretty dim bulb.

Really? Are you talking about all Democrats and Republicans? If so that is an incredibly naive and cynical view of the country. It sounds like something Rush might say.

I would point out that Bush is said to have gone above and beyond the call of duty in helping to enable a smooth transition of power. Based on what Obama's people have said about it, for the first time Bush scored some real brownie points in my book, as a patriot. Does this suggest that he wants Obama to fail?

 

[Ivan Seeking]

As for Rush, even the worst criminal can rationalize his actions so that he's not a bad guy. This isn't about having rational disagreements; it is about irrational ideologies.

 

[Proton Soup]

As for Rush, even the worst criminal can rationalize his actions so that he's not a bad guy. This isn't about having rational disagreements; it is about irrational ideologies.

many of your posts lately, Ivan, indicate that you are partisan beyond rationality, and i think back up my "cynicism" as you say.

 

[russ_watters]

Coming in a little late, so I apologize if others have already said some similar things...

How does one quantify the claim that a company is so large that its failure would take the national economy down with it?

It isn't clear to me what you are asking - your question appears to contain its own answer. If you are looking for the specifics of calculations that would imply that a company like AIG or the loan companies could be "too big to fail", that is certainly beyond what anyone here can do. About all we can say is...well...what you said: a company is too big to fail if it could take the national economy down with it. If a company like Fannie or Freddie stops operating, since it does such a large fraction of the money lending, it would cause a halt to lending and a destruction of any activities that rely on it. That's "too big to fail".

Imagine the hit the computer industry (and the economy) would take if Microsoft suddenly ceased operating...

And here is a bit of a paradox. There is no such a thing as "too big to fail" in a free market.

True...

But from a practical point of view, we can't have the entire economy subject to the whims of anyone corporate entity, so it must be that too big to fail means too big to exist.

Well in a truly free market, we wouldn't be able to make such choices. It sounds to me like you are selectively applying your definitions/logic.

But any action to limit the size of companies also suggests that we no longer have a free market. Therefore, there can be no free market.

Same: if you are arguing why there is a logical contradiction, you are creating it with your argument only - it doesn't exist in reality...

It seems to me that puritan free-market policies are not in the public interest - it is a dead concept. While I still favor maintaining as free a market as possible, I now wonder why I was ever such a fan of the idea. Puritan free-market principles now seem about as logical to me as the notion of passing on penicillin in order to allow a bacterial infection to run its course, out of principle.

Yes, a "truly free market" doesn't exist. Yes, it is a "dead concept". So I don't see how this is a useful thing for you to be bringing up. What's your point? You really need to be more specific about your point (and use some historical context to connect it to reality) for this to be a useful discussion. Ie, no one in a discussion of modern American market economics should be using natural monopolies as an example of a failure of modern American market economics. Such arguments are nearly a hundred years out of date (because they were banned via the Sherman Act) and a complete non sequitur. But for the basic concept of Laissez-faire economics, according to the Wiki on it, your arguing about the subject is closer to 200 years out of date:

Although the period before the American Civil War was notable for the limited extent of the federal government, the Austrian School suggest that there was a considerable degree of government intervention in the economy—particularly after the 1820s. Notable examples of government intervention in the period prior to the Civil War include the establishment of the First Bank of the United States and Second Bank of the United States as well as various protectionist measures (e.g., the tariff of 1828). Several of these proposals met with serious opposition, and required a great deal of horse trading to be enacted into law.

http://en.wikipedia.org/wiki/Laissez-faire#United_States

That is to say that I see no evidence that a free market ultimately acts in the public interest any more than does a weather system, a bacterial infection, or any complex and self-serving, or chaotic system.

I realize that that was intended to be hyperbole, but nonetheless, it is wrong to imply that a bacterial infection is always a bad thing. We could not digest our food if we didn't have bacteria working in our digestive system. The point being, there are few things in this world that are all good or all bad. So looking at a nonexistent/hypothetical extreme of the bad doesn't really tell us anything useful about the reality of how something can be made to function in the real world.

This could be a meaningful/useful discussion, but for that to happen, the hyperbole and non sequitur has to go away: the discussion has to be grounded in reality.

 

[russ_watters]

Now the aim of many of these items are to strengthen the economy. For them to fail, means a continued failing economy. So it is very clear that Rush is implying that he'd rather have a failed economy than an economy strengthened by something that goes against his ideology. IOW, if the country can't succeed on his terms, he doesn't want it to succeed at all.

Off-topic, but yes, that is my take on Rush's comment as well. That said, I do give him props for saying things that others only think, even if it does make him look like more of a jackass than them (and Mahr, when he gets carried away, let's you see how big of a jackass he is).

 

[mheslep]

Imagine the hit the computer industry (and the economy) would take if Microsoft suddenly ceased operating...

The idea of Too Big to Fail (TBTF) doesn't extend well out of the financial sector. TBTF is about risk and leverage in finance, and therefore confidence. A sudden death of MS may cause problems, say if Balmer embezzled the payroll and 401ks off to Argentina, but it's practically impossible to kill it's business model suddenly, i.e. the concept of MS Windows software can't immediately 'default'. Somebody else could buy MS in bankruptcy court and have every confidence that they'd reopen the shop and make money on their investment. GM is getting ready to go chapter 11, but that's not going to take Ford or Toyota down with them in some kind of 'run' on car makers, nor is there going to be any major shortage of cars. There is no AIG equivalent in other industries that systemically effect everything through the buying and selling of risk.