Too Big to Fail
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We have certainly heard a good deal about companies that are “Too Big to Fail” of late, so much that one must wonder if there are any companies left that are just the right size to fail. Everything seems to be too big any more.
Local restaurants always seem to be going in and out of business and the economy doesn’t fall apart although most of the places to eat in town seem to be fast food places and aren’t really local. Sometimes it’s difficult to figure out if a business is local or not or whether it’s really part of a chain with lots of different names.
When I think of a local or small business, restaurants are usually the first businesses to come to mind. Al’s Pizza or the Harbor Diner always seemed to be real local businesses. Somehow Pizza Hut isn’t quite the same. The problem is that Al usually isn’t content to have just one Pizza place any more; he’ll probably have twenty some day. I suppose he would be the right size to fail. Twenty restaurants isn’t quite important enough for a government bailout.
The idea of being too big to fail begs another question: if you’ve managed to get that big, why is failure even a consideration? Isn’t big supposed to be a sign of strength?
People worry a lot about things that are too big any more. But, strangely enough, size is a very relative term. The real problem is not size but control. “Too Much Control to Fail” would probably be a better way to identify the problem. What’s happened to the banks is as good an example as you will find. There are thousands of banks in the country but there are about five of them now that control more than 30% of all the deposits. Those five are a pretty good bet to be in the Too Much Control to Fail category, which seems to be the prime security net most companies are trying to achieve.
Banks are different from corporations though, they don’t really make anything; they look upon themselves as the vehicle that allows things to be made. Banks and what they do affect everyone from the local teacher to Al’s Pizza to AT & T, so, painfully, governments have learned that banks have to be watched a bit more carefully than other businesses. The rule for banks should be: always err on the side of more regulation and oversight not less.
Corporations are a bit different. For corporations the key is lots of competition and a level playing field. The competition promotes innovation and creativity while the level playing field permits that innovation and creativity to succeed.
For some reason, when things get big the innovation and creativity function seems to falter. Innovation and creativity take the form of acquisition, which is how many of the companies have managed to achieve their size. Research and development is replaced by financial manipulation and innovation in the search for mergers and acquisitions. While politicians are always quick to show their economic expertise by stating that most jobs are created by small businesses they have failed to notice that more and more people are dependent on giant corporations for their paychecks.
The key words in the “Too Big to Fail” statement are “Too Big.” The simplicity of the lessons, fables and fairy tales we learned as children and have been around for centuries have not endured because they are false.
“The Bigger They are the Harder They Fall.” Who can dispute the reality of such a statement, which has been born out time and time again? Sooner or later the size of the control an entity has in a marketplace will be a negative, yet we continue on a path of consolidation.
Governments and economists cannot eliminate the negative aspects of the business cycle but they have the ability to mitigate its severity and the frequency of its occurrence. However, to do so they will also have to restrain its upside. The latter part is where we usually lose out resolve. When one is out in front winning the race the call for everyone to ease off the accelerator to save the engine is usually met with objection. There is always the fear that someone in the race will not comply and gain an advantage and without regulation and monitoring they are right – and all the participants know that self regulating isn’t really going to work because no-one really trusts anyone else to fully play by the rules, or is it they don’t trust themselves.
So where does this leave us with bailing out the