Daily Archives: January 30, 2009

Too big to fail, the failure of “free markets” 4

Over the past year, we’ve seen a string of banks declared as “too big to fail.” As a result they got hundreds of billions of dollars in essentially no-strings attached bailouts. In return we’ve seen them payout $20 billion in bonuses to executives that helped lead these banks to the verge of collapse. Why has this happened? Precisely because the policies of deregulation happy Republicans allowed them to.

These same “conservatives” like to cite Adam Smith and the idea of laissez faire economics. That is the idea of taking a hands off approach and letting the market find its own way. The problem is that to have a free market as envisioned by Smith, there needs to be enough players on both the supply and demand sides of the market equation to prevent manipulation by individuals. This is where Smith’s ideas have fallen apart in the modern world. Over the course of the twentieth century, corporations have grown progressively larger while the numbers of companies in many business segments has shriveled.

As that has happened, those huge businesses have taken control of the market and made it exceedingly difficult to new players to come in. Without someone to call bullshit, huge financial companies have also created a bogus economy that was built on a web of lies. By largely abandoning anti-trust enforcement over the last several decades we have allowed unprecedented consolidation to occur. The result is that institutions with far too much influence on the overall economy have developed. The combination of these over sized players and excess unchecked greed leads to stupid developments. Ultimately this is unsustainable and we have the situation we see today.

If there is one lesson that we must learn from the events of the past year it is that these huge companies should be broken up and never allowed to consolidate to this degree again. There is no reason why companies should be too large to fail. Some anti-trust regulation is a good thing regardless of what Republicans say. Will we learn this lesson? Unfortunately, probably not.