Companies That are Too Big To Fail Should Not Exist

by Odysseas Papadimitriou on July 1, 2009

too-big-to-failThis recession has been characterized by the presence of companies that are so vast and influential that their failure actually endangers the American economy.  The names of these companies, GM, Chrysler, AIG, Citibank, Bank of America, and so on, are all too familiar to us from their prominent place in news stories about economic disaster.  In order to prevent systemic economic collapse, America has resorted to bailouts and political bankruptcy,  essentially changing the “rules of the game” in order not to have these failing companies take our economy down with them.  What is clear is that the benefits reaped by the economy in allowing the existence of these financial giants is nothing as compared to the damage caused by their collapse.  Companies that are too big to fail should simply not be allowed to exist.

We should remember that capitalism is based on free market principles in which companies compete with each other.  If one fails, other and presumably better companies take its place.  Thus, the market evolves so as to better meet consumer demands.  Companies fail in a free market economy because they are unable to compete with stronger business models.  Moreover, they should be allowed to fail in these circumstances so that better business models can take their market share.

When, instead, a company that should fail is kept alive through tax payer money, it maintains the share meant for another better company and thus, prevents innovation.  What’s more, the tax payer becomes an investor in what is, by definition, a failing company.  It goes without saying that it’s a bad idea to invest in companies that have flawed business models and/or incompetent management.  This means that in keeping these companies alive, we are forcing the tax payer to make bad investments.

Lastly, once the government takes, through bailout, a prominent role in the administration of the company, we are introducing a set of decision makers into the mix who plainly have no idea how the business is run.  What does Congress know about running banks, insurance firms, and car companies?  Recently, Chrysler tried to close down franchises to increase its future viability after its bankruptcy.  Basically, as a failing company, they were attempting to make themselves operational again.  In trying to make itself a viable business again, Chrysler has had to face lawmakers who are overly concerned about the small business owners operating those franchises that need to be shut down for the company to survive.  The bailouts have made the company accountable to people who don’t understand how a business like Chrysler needs to be run.  What’s more, through bailout, not only are taxpayers investing in a failing business, but they are also investing in a business that, through management by Congress, is plagued by additional inefficiencies.

The sad truth is that sometimes businesses fail and that size really doesn’t insure success.  We understand that Congress, essentially, had to do something with the various enormous companies that would have recently failed without aid from the government.  Our economic system was in danger and collapse needed to be prevented.  Now that disaster has been averted, however, Congress needs to  spend less time focusing on things like the number of franchises the company can successfully allow, and more time preventing these gargantuan businesses from coming into existence in the first place.  Right now, the U.S. maintains laws that prevent monopolies, why not have a similar process which prevents the creation of companies that are too big to be allowed to fail.

Discussion

Rekha Sharma
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May 23 at 07:35 am
Coolhandluke
Why do we help companies when families are forced to repay their loans. The guy at www.slickbudget.com nailed it in saying it is us against corporate greed and the government is not on our side. Check out the updated bankruptcy rules to understand why.
July 13 at 12:05 pm
Hanoch
The term "too big to fail" is just a another way to say "we don't want to deal with the short term pain." These companies made poor decisions and should have been left to sink or swim. The notion that the American economy would have gone into a death spiral without government bailouts and takeovers is nonsense. To the contrary, the government's meddling with the free market will only make things worse.
July 3 at 10:42 am
Hilary Smith
The Right won't be satisfied until our children are working 20 hour days in dirty factories and our elderly are dragging their half-dead starving carcasses to the soup kitchens for a shot at some bone soup. Then they'll tell us what they tell us now which is that "no one is starving in America." They'd love to see us clawing each others eyes out, licking our chops just for the chance to work for rotten scraps. The proponents of social Darwinism will never give up until they've made their sick c
July 1 at 05:21 am

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