Too Big to fail...

Once again today, Citi Bank is in the news as failing the governments stress test.  It was the largest to fail the tests, and it's not all bad.  It failed because it wanted to raise it's dividend, and buy back stock.  This leads to a more global argument about being too big to fail.

It is my opinion, and historical proof that no enterprise is too big to fail.  When a company or institution fails, there is a need, which other organizations flow in to fill.  That is the way capitalism works.  If you want to see a system where the government props up businesses, simply because they don't want them to fail, look at China.

Even China is taking a second look at this, they announced recently that they will not bail out every company as they have in the past.  There are different reasons companies fail, but the bottom line is failure needs to be part of the system.  For example in China, because of government activity, they are experiencing a time of over capacity.  Over capacity happens when there is more production ability, than is needed to meet demand.  That brings prices down, and when the price a company can charge is less than what it cost them to make it, that company fails.




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The opposite can be true as well.  That is why government regulators scrutinize certain mergers and acquisitions from a competitive stand point.  If there are not enough competitors then the price will rise on the goods they produce, and often the quality drops.  In the 1960s we saw that with the automotive industry.  During that time, imports were not a factor, GM, Ford, and Chrysler pretty much sold all the cars that Americans bought.  They got lazy, and quality dropped.  Today, we have some of the best made vehicles ever.  Back then, if you got 50,000 miles out of a car, that was considered very good; and by 100,000 miles the wheels were falling off.  Today we have cars that at 100,000 miles are just getting settled, and I have seen (and owned) some with close to 200,000 miles.

When there are too few, large companies in an industry, it reduces quality and causes prices to rise, it is simple supply and demand.  Too big to fail is an incredibly short sighted view by the government.  It prevents people from moving up in class from low to middle and middle to upper, but it does lock the rich in their state, and protect their wealth.  If a large company is allowed to fail, it will in effect, redistribute wealth to other more productive people.

I'm an older guy, when I started my career in retail, the top five companies out there were Sears, Kmart, JC Penny, FW Woolworth and Montgomery Ward.  Today, Sears is not number one, even after merging with Kmart, it is instead an unheard of company back then called Wal-Mart.  If Sears was considered too big to fail, discounters like Wal-Mart would not have had the opportunity to thrive.  Not that all Wal-Mart has done is a good thing, but that's another post.

Should Willy's Corporation have been saved?  How about Duisenberg?  If not them, why GM, or Citi, or Leman Brothers, or any other large firm?

It is always in the politicians best interest to have high placed friends, that's what funds election campaigns.  It is in their best interest to keep big firms big, to the detriment of their constituents.  And we can see the result of this policy today.  Main Street is dying.  Main Street is the maker of the middle class.  Wall Street is thriving.  Wall Street is the keeper of the upper class.  This has prevented the normal movement between classes and is in the process of establishing a rich royalty.  And isn't the royals the primary reason for our Revolution over 200 years ago?  Do you want to be in the lower class forever, with no hope of moving out of it?  Wasn't that the draw of America in the 1800s?  The European poor would strive to afford a one way ticket to America, there if they worked hard, they would find security for themselves and their families, something not available in the kingdoms of Europe.  You did not have to be born into money, you could find a way to move in to money.

Too big to fail should be an anathema to the middle class.  And since the middle class pays most of the bills in our country, we should demand of our leaders to abandon this line of economics.  It just doesn't make sense!

Spend Wisely!

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