Too Big to Fail?

I call it "too big to succeed"

This 'too big to fail' doctrine reminds me of those novice poker player that realize they have a loosing hand once they've cashed out too much money for their own good, and raise the bet hoping to buy away the pot. Except they do it with their money...

I positively hate this reason for a bailout or any other rationale. Too important to be gone, it would wreck the economy without them, etc. I'm in the insurance business and have policies written with AIG. It's simply stupid to dump money into their enterprise and hope that they can find some kind of solution. So far, $140+ billion later they are no closer to being solvent nor is the market any better. Capitalism REQUIRES that they should fail so the rest of us can succeed.

Exactly.

Yes, because the bigger the failing concern the bigger the waste. My heart has always been with the small, nimble and efficient, which I'm afraid are being kept from rising to the top.

As for the auto industries, if they would just fail naturally, the best minds could form another company more in line with innvoation and the 21st century -- that is if government would allow it.

This is exactly ass backwards thinking! We need to save GM to save all those high-paying UAW jobs that are so vital to our prestige and industrial base! This yet another attempt by the neocons to bankrupt America...

Any "unintended" negative consequences if they are allowed to fail?

If they are to fail, is it better they do so marginally over time, or as a shock?

Other more profitable carmakers are concerned that a shock to their mutual suppliers from a failure of their US competitors would cascade into problems for their businesses.

I think some see "too big to fail" as a personal challenge.

Reinforces my belief that bankruptcy court is the only bailout system we need, only maybe not quite as compassionate.

I can't help but wonder how many sound ideas in automotive technology have been suppressed by the barriers to entry of the big three, who are now on the brink themselves.

I'm sure they would all emerge from bankruptcy just fine -- only better. Let 'em fail. Perhaps it's what they need most, even.

Plac Ebo, they don't have to be allowed to fail, they don't need permission. They already failed. Consider them failures. They made bad decisions, they kowtowed to union rules and government rules when the money was good and they could afford to, but those were promises they can't keep anymore. So your question should look more like "are they any negative consequences if they are allowed to recognize the consequences of their own failures?"

The answer is yes, there are negative consequences, shareholders lose money, vendors lose that business, and the people who relied on the promises made by those firms lose out too. But the economic answer is that those costs are less than the costs faced by the attempt to prop up the failed firms, the seen and the unseen problem is rearing its head once again. The way to minimize costs overall, and promote the greatest amount of well-being, now and into the future, is to let individual actors make their own personal decisions regarding employment, investment, consumption, etc, with their own property and talents, without resort to force and fraud.

I have to agree with Don and ask the question what happens if a firm fails. If the product they produce has viable demand, other firms who can profitable produce it will increase their production and substitute for it. The increase might not offset the total production loss but other firms will increase production as well. Due to this there will be workers who will be able to find jobs at this other companies.

Check out this chart comparing wages in the Big3 auto industry with other sectors, then grumble.

Sam:

That (much circulated) chart is not just "wages."

"This is exactly ass backwards thinking! We need to save GM to save all those high-paying UAW jobs that are so vital to our prestige and industrial base! This yet another attempt by the neocons to bankrupt America..."

-- Crusader

I'm not a neocon but it seems to me a bailout is a prop up and postponement of the inevitable, and that the companies will continue to bleed money. The only way they can compete is without the union expenses which are pretty much entrenched. They made bad deals with the union and it destroyed them. Perhaps the best among them can create another company and name it Phoenix.

It seems like the pro-bailout side is having to change their argument a little. No longer are they saying that the Big 3 are too big to fail; now, it's that they're too interconnected to too many other businesses to let them fail. A slight shift/different tact.

The other point that I thought you'd raise, Don, is that it makes no sense to tax the American worker in Alabama who works for a foreign car company, and give his money to his company's competition.

Plac Ebo:

"Any "unintended" negative consequences if they are allowed to fail?

Posted by: Plac Ebo | Nov 17, 2008 12:38:23 PM"

To precisely answer your question, I ask you a question.

How do we know?

If we know, they wouldn't be unintended negative consequences whether we allow them or not.

We can assume that there may be unintended negative consequences as we assume that there will be unintended positive consequences. Both of those while not interfering with the natural failure deserved, and acheiving the intended positive consequence stated by Don.




But, then those who really really really really want change, as Obama supporters claim they do, should realize that to refuse to move on change because of a fear of unintended consequences means stagnation, which means death.

Conservatives know that change means that the door is open to whatever walks in, and we had better be damn well prepard to deal with it, or we keep the door closed.

So which is it, change or stagnation. Choose your poison.

Prof. Boudreaux,

Congratulations on this as on all your wonderful pieces.

I love the simplicity and clarity of your and Prof. Roberts' writing, a welcome contrast to the style on another similar blog, which I suppose you would rather I not name.

I consider myself fairly knowledgable on the basics of economics, but I certainly understand the fallacy of "too big to fail" much better after your piece.

Thank you for that rarity, real economics.

You and Roberts are doing a superb job.

Prof Boudreaux,

Hope this doesn't duplicate a posting I just tried to make, but it appeared not to have posted, so, I try again.

Congratulations on the "too big to fail" fallacy. I thought I understood it pretty well, but understand it much better now.

And Congratulations to you and Prof Roberts for your simplicity and clarity, a welcome contrast to the style at another similar blog, that I suppose you would rather I not name.

You and he are doing a superb job.

Perhaps the UAW should buy the Big 3. Then they could do what they want.