Too Big To Fail: A Dangerous Precedent

Is this not the biggest load of hogwash in the modern era? The phrase “too big to fail” should be blasphemy. Somehow it has now rooted itself as a national catchphrase. Has the country lost its mind? Or does the government think it can just defy fundamental economic principles based solely on the size of whatever entity it deems “too big to fail.” While we’re at it, why don’t we just ignore gravity, motion, speed, human nature, and all these other things that have set guiding notions and underlying rules? Invincibility is born neither on size nor stature.

Too big to fail comprises more than one singular problem:

First, nothing… let me restate that, nothing is too big to fail. The phrase, in and of itself, simply implies that once someone reaches a state grand magnitude (in a relative sense, in an absolute sense, who knows?) then <poof!> the risk of failure just vanishes?

What?!

At the beginning, TBTF was applied to corporations. In this past week it has been applied to the Italian debt crisis and the Penn State football program’s sex scandal. Just imagine, however, that TBTF made its way down to regular Joe status. I mean, heck, each person should be full of pride anyway. We should all think of ourselves as too big to fail. We cherish life and all the materialistic things that go with it. So imagine each American being too big to fail. I know this is a gross exaggeration, but, maybe the exaggeration itself is too big to fail :-)

A life with no risk of failure, huh? Isn’t that what TBTF implies? It sounds wonderful. How would each person handle it? Me? I would start buying all the toys I can’t afford. This would be done on credit, of course. Why? Because I’m invincible. I’m too big a person to fail. My house can’t be repossessed if I fall behind on my mortgage payments. I wouldn’t have to declare bankruptcy. My car and other possessions would be safe from the perils of grossly irresponsible behavior. I would have absolutely no reason to act as if anything I chose to do mattered. If my fellow Americans behaved like this it would be devastating.

My biggest question is: why should anyone receive this kind of special privilege? Seriously? Too big to fail? Why some and not others? Does the government realize the message this sends? TBTF tells companies (and potentially now, countries) that they don’t have to be on their best behavior. I don’t need to go through the rigors of supply and demand, but take a look at GM. They were on the verge of bankruptcy. The demand for their vehicles had been fading over time. This is because they weren’t putting forth products customers wanted at the prices GM charged. Not only did GM put forth undesired products, but it mismanaged the prices and related production costs of these products. Ideally, GM should have slowly been allowed to drift into bankruptcy (yes, that’s what this financial instrument exists for) if it did not make the proper decisions to right its own ship (making better products, and/or reducing prices). The same goes for the companies bailed out by TARP. Sure, many are now solvent, striving companies. Many have paid back their “gifts” with interest. But what’s the cost? Ultimately, the biggest, most hurtful cost is the destructive nature a bailout breeds. It teaches companies like GM and AIG that they don’t have to be on their toes. They can run their companies inefficiently while putting forth undesirable products, and instead of eroding to a level of insolvency like any company should do if it’s not run properly, big daddy government will come save the day. Bailouts like TARP ultimately hurt. They extinguish one fire while starting 3 others years down the road. A parallel exists between a corporate bailout and government-sponsored, incentive-to-work killing social programs. They both provide temporary relief, but the destructive notion of, “why the heck should I try to do my best” slowly erodes any healthy work ethic which will lead any company or person back a terrible situation where they need to get bailed out again. Too big to fail is bad business, and its destructive nature seems to be washed away in rants and memorable catch phrases.