Too Big to Fail…Really?

We have heard the phrase “Too big to fail” thrown around recently with all the talks of stimulus packages and bailouts. Obviously these companies weren’t “too big” to be immune from failure, but many individuals, and many in government argue that allowing a company of such size to fail would be crippling to the economy. This brings up two points I’d like to discuss. First, how do we allow a company to reach a point where it is too big to fail? I found a letter to editor from New York Times at the following link.
As pointed out in the letter, Anti-trust laws are in place to protect us from large corporations who monopolize industries and destroy competition. Perhaps that definition needs to be expanded. Because even though there are more than 8,300 banks (according to a previous post: Nationalization of America’s Banks), and there is competition among them, I still think the American economy has been hurt in such a degree perhaps monopolizing banks would have been a better alternative? I certainly don’t think so. I think the solution is found in not allowing banks to become so huge. I think banks and other corporations should not have been allowed to acquire other companies, and been allowed to turn themselves into the monstrous giants they have become. I believe in economies of scale, but I think we have gone well beyond that at this point. In looking toward the future, politicians may want to rethink how we interpret Anti-trust policy.
My second point: I was also looking through to find data on the companies who had already received money from the first stimulus package (TARP funds). This list is found on at this link.
Take a look at the list and sort the companies by size of TARP funds received. The last Company on the list was the Calvert Financial Corporation which received $103,700 of TARP funds. I’d like to know how this company was 1) “Too big to Fail” and 2) how is that amount of money going to help out a financial corporation when that sum of money is not even enough to bail out former boxing champion Evander Holyfield? (http://sports.espn.go.com/espn/print?id=3428080&type=story)


Jason said...

I would agree with the points touched upon in this post. It goes along with what was talked about in class about discretionary policy. Bailing out these banks that are "too big to fail" isn't fixing anything. The problem is that they are too big. They need to be broken up so that we don't have this same problem flare up in the future.

Victoria said...

As Sophia said, Antitrust laws are in place to protect us from large corporations who monopolize industries and destroy competition.So this is a good time to analyse about Antitrust laws and government should add more constraints for the policy.

Dr. Tufte said...

I think "too big to fail" is a euphemism for "we don't have the guts to stand for re-election if this fails". That's not the same thing.

One thing we do know from microeconomics is that regulations are fixed costs with respect to most marginal decisions. The way to deal with that is to spread those fixed costs over as many transactions as possible: therefore, regulation leads to size.