Too Big NOT to Fail

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We all know the phrase by now…Too big to fail.  It was the catch phrase of the financial meltdown of 2008, and the excuse for bailing them out in the years after.

"Too big to fail" became the mantra for the very big but undercapitalized bank on Wall Street and overleveraged banks throughout the country.  And like all American tragedies, we immortalized it with a movie of the same name. But where are we now?

We have ginormous banks sitting on trillions of tax-payers’ dollars, care of the Federal Reserve, doing not a helluva lot with it.  In fact, the banks are paralyzed with fear of losses if they lend on the one hand, and are busy sucking the value out of the country on the other.

What is too big to fail supposed to mean?

Too big to fail was supposed to mean that if the banks failed, then the country would fail, too.  The economy would be frozen, without credit, and unable to function.  Also, the big banks, the really humongous ones like Citibank, J.P. Morgan, Goldman Sachs, et al, were supposed to be the backbone of the country, the engine of economic growth, etc.

But is that true?  And what would happen if it did?  Would the economy stop forever?

Bigger was supposed to be better, right?

In basic Econ 101 classes, we learn that larger firms obtain economies of scale, and thus do a better job of being efficient and profitable.   That’s why Wal-Mart puts little shops out of business.  Well, we still have those same banks today, and they’ve got lots of cash, but the economy is not growing at all.  Forget about the bollocks that the government spoon-feeds us about “2% growth,” “moving in the right direction,” “falling unemployment” and the rest of it; the reality tells a different story.

The economy isn’t growing at all; unemployment figures, declining housing starts and rising prices all mean that the economy sliding backwards.  And even with the best lipstick on this pig, on its best day, our economy is in a coma. What happened to economies of scale for all those big banks?

The bigger they are…

Enter the concept of too big not to fail.

What does that mean?  It means when you’re too big to fail, you get favors from government and other entities…and you give them.  It means that when you know that all risk is backstopped by taxpayers and discretion is guaranteed by your political cohorts, that there is no risk too great to take.  It means that fraud and deceit become not only acceptable, but the only way to quick fortune and power.

It means that with all of that fraud, deception, theft, and degradation of the business and political cultures, there is no way that they cannot, eventually, fail.

Isn’t that what happened in 2008?  The system was so choked up with debt that no one believed would be paid, and so there were no more buyers.  Debt became seen for what it was—empty promises.  Empty promises are lies.  How do you back up a lie?  There’s only one way to do that, and that’s with…another lie.

So what did we do?  We flooded the world with more money—more Federal Reserve Notes.  Notes are debt, aren’t they?  So we just issued more empty promises.  We just told ourselves, and the world, much bigger lies, which are what the economy is running on right now…

Too big not to fail also involves another concept--the dis-economies of too much scale.  At some point, too big is too big.  Efficiencies are lost as bureaucracies swell.  We’ve see this in government for decades.  The same concept applies to banking.  The left hand doesn’t know what the right hand is doing.  And after a while, the economic imperative becomes less and the greed imperative—how much can we get from the system?  How can we maintain the status quo?—becomes the overriding idea.

This concept was beautifully expressed by Mancur Olson in his book, “The Rise and Fall of Nations” where special interest groups’ raison d’etre eventually becomes the simple idea of taking as much from the economic pie as possible by legal dictates, not adding to it by profitable economic activity.  Big banks and big government—both corrupt to the bone, by the way--are their own mutually supporting special interest group.

The bottom line?

When the financial field is full of thieves, and the political oversight becomes politically corrupt, thievery becomes the only way to do business.  When corruption becomes the rule rather than the exception—and punishment is withheld— then the system is no longer one of economic policies, but rather, favors passed back and forth between the government and big business.  Think of Jon Corzine, who very publicly made off with over $1 billion and who is a Obama financial supporter and well-connected former political office holder; he is not only off scot free, but is starting a new financial firm.

It’s funny, in a way, how the Left and the Right both point fingers at the other.  The Left hates big business, (and the banks are as big as business gets) while the Right hates big government.  Both sides are right, of course, but in our world where political and government corruption rules the day, of there are no mechanism to address both at the same time….

Except, of course, system failure.

And those are…The Gorrie Details.

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