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TOO BIG TO FAIL?

May 5, 2009

Johnson
The Economic Policy of Unrestrained Greed
By Tyler Johnson

Chair of the Congressional Oversight Panel and Harvard Law professor, Elizabeth Warren, recently quoted astronaut Frank Broman in reference to the financial crisis. She said, “Capitalism without the threat of bankruptcy is like Christianity without the threat of hell. It doesn’t work very well.”

Critics of recent economic policy, namely, the policy to “bail out” multinational corporations have been asking questions. They question why we must “bail out” companies. Why can’t we let the big banks and corporations fail? If I run my small business into bankruptcy, they say, no one will bail me out. Shouldn’t we let the free market, and not the government, sort out the problem? It was, after all, big business executives and financers own fault, right? We should hang these Wall Street big wigs out to dry!

The government has deemed various multi-national corporations and banks “too big to fail.”

Certain companies have bought and created debt that was molded into investment products that were then bought again and subsequently repackaged into further more investment products. They have become so large and interconnected that some believe bankruptcy would ignite a chain reaction that would affect virtually every business—small and large—in the country. Some postulate that their failure could lead to the wholesale destruction of our entire economic structure.

The national, and possibly world, economy would subsequently collapse.

Everything from risky hedge funds to safe mutual funds and 401ks has consumed the toxic investment products. The fault not only lays at the feet of Wall Street fat cats, but also with your mom and dad—trying to cash in on the free money machine that was our stock market—gleefully neglecting the lessons of the tech bubble crash.

Consequently, failure—allowing these investments to unravel—would lay waste not just to Wall Street, but also to a majority of the population for years on end. No one knows how bad it would get.

Something must be done to prevent a similar crisis in the future. The answer, with apologies to my laissez-faire libertarian colleagues, is regulation.

When probed about the size of the quasi-private lending arms of Freddy and Fannie Mae, Alan Greenspan said, “Fannie and Freddie were not too big to fail. How do I know? That’s what the law said.” Greenspan understood that the law is the only restriction that directly limits how large a corporation can get. His statement perfectly illustrates a flaw in pure free market thinking. Left unhindered, a corporation’s best interest is pure profit—at the expense of all else, there is no individual self-interest. Profit is the only reason for its (the company’s) existence. Thus, the company will push to the very boundary of the law, regardless of ethics, morals, or social responsibility, for that is how the system was created to work.

In Federalist 51, James Madison wrote, “If men were angels, no government would be necessary.” Madison understood human nature. He understood that restrictions were necessary to insulate individual desires from corrupting the whole of society. There must be smart, balanced regulation to ensure that the system will work to benefit all.

The alternative is a world where corporate identity will supersede the ideas of capitalist Adam Smith’s beneficial self-interest. The benevolent “invisible hand” becomes the hulks fist, smashing everything in its path on a quest to satisfy its unquenchable thirst for profit.

We need to ask ourselves what we really want to get out of the system. Should pure profit be the only motivation, or should we ask ourselves if there is something more? Can we alter our definition of profit and value to include societal good, or should we trust unfettered free markets and return to the pre-Depression days of “boom and bust?”

We must learn a lesson from the unrestrained greed of the past decade. When we rig this new game of lighting fast technology and instant information, by creating superstructures and businesses too big to fail, ceteris paribus will not save us, because nothing ever stays the same.

Tyler Johnson is a senior Business and Economics double major.

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One Comment leave one →
  1. October 26, 2009 1:18 PM

    How about relying not only on regulations, but also considering Paul Volcker’s advice from experience: being too big is itself a problem that can and should be remedied? I’ve just posted on it at http://euandus3.wordpress.com/2009/10/25/bigger-banks-too-big-to-fail/

    You might want to read the article I read: http://www.msnbc.msn.com/id/33477077/ns/business-the_new_york_times/

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