If companies are too big to fail, should they be broken up?
 

Wouldn't this help in fixing the problem? Sure, the people who are pro merger & acquisition wouldn't be happy. It's the idea that growth is always good and the market rewards that caused that. The CEOs and board would lose out by being broken up into smaller companies, but there would be more of them (and those are good paying jobs ;) )

But it worked wonders for AT&T a few decades ago. I'm not sure if the roll out of cell phones would have been as fast had AT&T been the only company. Why would they want to update the landline market that is making them lots of money. Also, there wouldn't be nationwide long distance, higher monthly rates, and a bunch of other consumer benefits since more companies are competing for my business.

Would the banking industry be helped by this? Would these banks have done the things they did had they been smaller regional banks? Then again WaMu was a regional bank, but it was the biggest player in the region.

And would GM be better off breaking up into their own product lines? Not necessarily competing against each other and using combined resources when it makes sense, but allowing each car maker (Pontiac, Chevy, Buick, Saturn, GMC) go off and produce their own cars (but still using similar parts to be cost efficient). I don't know.

It would promote more competition while also helping maintain economic equilibrium. I'm all for it, and I think our laws need to be updated to reflect these benefits.

It won't happen, but it'd be nice.

I'm wondering why no one is even suggesting it. Is it a bad idea economically? Or is it politically a bad idea?

it was mentioned on NPR, the idea that what massive banks remain are buying up smaller banks creating a near monopoly situation the economy is totally dependant on not to fail. funny how we need the banks to function but in effect we are slaves to them.

Splitting larger companies down into smaller companies would mean more failures, but none that would need to be bailed out as a systemic risk.

In my utopia, there'd be a hard limit to employees/revenue as a share of gdp (like 0.1%)/etc for companies and corporations before they'd need to be split into autonomous pieces.

Less efficient, sure. Efficiency of company structure really shouldn't be a goal unto itself, though, or else we're headed to a single, global monopolist...

These banks getting bigger will, over time, have more confidence. All history points toward there then being an opportunity to exploit up to and beyond the limits of reason. Then they'll be back in their current position, but an order of magnitude bigger, with more at stake should they be allowed to fail.

Huge financial monoliths are the doom of this model for society.

I would argue companies are not too big to fail and that failure is healthy for the economy.

Of the original Dow companies (12 in 1896) only one is still in business as originally chartered, General Electric. The Dow in 1979 compared to today, there are 5 companies out of 30 still in the Dow as originally chartered, Merck, 3M, GM, GE and IBM. Weak companies can get acquired, can go out of business, or can get smaller based on pure economic parameters without interference from the folks in Washington. It has happened in the past in a healthy manner and can happen now in a healthy manner.

I think our current problem with letting companies fail has more to do with "special interests" in Washington more than it has to do with the health of our economy.

Nothing's too big to fail. The issue is when the government steps in to bail them out. If we're going to be a capitalist system, then let's be capitalist. If we're going to have elements of socialism, then let's implement them correctly and not just spend trillions on horrible investments.

It is interesting that the industries that are the most heavily regulated by governmental entities are the ones in the most distress, i.e., banking, and auto manufacturing. Government thinks more government is the answer. Scary isn't it?

Banking (which was deregulated to blur the line between commerical banks and investment banks) and auto manufacturing (which successfully fought any new regulations for the last 20 years) are hardly the most regulated industries.

Food and drugs, other consumer products, insurance, utilities, health care, solid waste disposal...... are regulated much more than banks and auto manufacturing.

Letting banks like WaMu, Wachovia or Citigroup fail is great... if you're a fan of shotguns and tinned food, quickly degenerating to agrarian society.

Companies do wrong when they become a systemic risk to good governance in failure.

this libertarian thing would be debilitating entirely in a situation of crisis. if you couple that with arbitrary infotainment (automobile manufacturing is heavily regulated? on what planet?)....well, there's no need to go on.

to say the obvious, there is *no* strict separation between the spheres of economic, political and social activity when you get down to it--the political order under capitalism derives its legitimacy from the regular functioning of the economic, which in turn leans on the social---so economic failures that impact too heavily on the social world are in themselves political problems. given that, states have little choice but to intervene---and if they do not, that is in turn a political action--neoliberals, despite what they say, knew this full well, and if you think about, say, structural adjustment, constraining state action was a political calculation imposed by the north on the south for particular reasons of political expediency from the northern/imperial viewpoint.

anyway, that a state more or less has to intervene when things pass a certain point is given--*how* they do it is not. the bush people have chosen to encourage concentration as a way to "deal with" this crisis. i see them as functionally boxed in to this option as a consequence of their seeming inability to think of the state as a viable actor in the economy and the endless series of ad hoc pseudo-measures.

i think that anyone who is paying attention is just hoping that things hold more or less together until february...but it's not at all given that this will occur. the options obama will have to reverse the concentration-as-tactic moves that the bush people have allowed seems to me minimal--but changing the overall political frame that orients actions is entirely necessary and doable. this is why i am concerned by the number of centrists in obama's cabinet so far---i think an aggressive break with neoliberalism is a prerequisite for coherent action (both in this situation and in general)--i am not sure if the personnel is an indication of policy logic or if it is more an indication of a mode of governing that is neutral as to policy...we'll have to see.

The truth is that the opposite is true. Nowhere is the more clear than in the case of Fannie and Freddie, which actually started failing as regulations became more lax.

Having just posted in the latest gun control thread, it occurred to me that I should have included guns in the list of industries more heavily regulated than banks or auto manufacturers.

It is lack of regulation that led to the banking disasters in the US.

In Canada, there are much fewer banks, more regulation, but no Canadian bank will fail. The concept is virtually unheard of here, while US banks fail constantly.

By what standard do you measure your view? In my view banking is directly tied to monetary and fiscal policy, totally controlled and regulated by government. Bank charters, reserving, investment, accounting, financial reporting, even FDIC and all other aspects of their operations are controlled by federal or state regulation. They even have a mandate to loan funds to targeted areas or risk their charters. Fannie and Freddie central in home loans are quasi-government entities, they virtually control the home loan market.

I could continue but those who get it, got it already and to those who don't it won't make a difference.
-----Added 10/12/2008 at 01 : 17 : 08-----
This is not correct. You don't cite a source so I don't know where to begin in terms of countering this claim. One thing you can help with is to specify what deregulation you refer to.
-----Added 10/12/2008 at 01 : 23 : 40-----
Analogy alert. Read at your own risk.

It is like a person in federal prison. Everything they do is controlled, they are under guard (like being heavily regulated), but then you have a prisoner commit suicide. On the surface one could conclude that they were not controlled and under guard since they committed suicide. Kinda like Fannie and Freddie, they were controlled and under guard, but they still took suicidal actions. On the surface we could say they were not regulated, but the truth is they were. The problem was just like with the prisoner we did not account for and "regulate for every possibility for suicide. Live and learn.

Analogy alert ended.

ace...you are completely ignoring the significant banking deregulation of the 90s - the Financial Services Modernization Act, which tore down the wall between banks, securities companies and insurance companies....and in the view of many economists, was largely responsible for the reckless and unregulated practices of those institutions and the current state of the banking and investment communities.

I could continue but those get it, got it already and to those who don't it wont make a difference.

I don't ignore the legislation, I just want to look at the issue in more detail. On the surface, even the implication of the way people summarize the legislation is misleading - there were regulatory changes, but the implication that the industry was deregulated is misleading. When people say that legislation has lead to our current crisis, I am interested in knowing what specifically contributed. It is certainly easy to say - oh, it was banking deregulation..., but is that it?

There's no surface about it, as regulation of Fannie and Freddie decreased, corruption and incompetence increased.

Perhaps there is. Perhaps increased regulation lead to the problems at Fannie Mae. Here is a tidbit, perhaps an inquiring mind would want to dig into regarding your position on the issue.

HUD Forced Fannie Mae/Freddie Mac To Increase Loans For Mobile Homes - Say Anything

You may argue, oh that's nothing, just a blip. But I argue the blips add up, and clearly Washington was involved in directing some of Fannie Mae activities, even during the time you would argue regulation and oversight was getting lax.

It's relative, though. Compare the total amount of regulation in 2004 vs. 1997. Then things become clear.

If you say so.

What is not correct? That US banks fail and Canadian banks don't? I assure you, it is 100% correct. The US system has banks failing regularly - even outside of this latest crisis which has claimed big name victims (remember your Savings and Loan problems of a few years ago?) - and in Canada, we have a much smaller number of banks which are tightly regulated and insulated against risk and are much, much less vulnerable to failure.

The US banking system allowed ridiculous risks to be taken with mortgages. Those risks are simply not allowed to be taken here due to various regulations (although because all large corporations invest abroad in a variety of paper backed assets, we suffered a smaller exposure to the problem in another way).

Don't let capitalist or libertarian or whatever dogma interfere with reality. When it comes to safeguarding people's money, when it comes to making sure people - whether good or bad, well meaning or bad intentioned - keep other people's money safe, a bit of regulation lends a lot more protection.

As to the deregulation (although it was not something I said specifically - I was comparing the banking habits of the two nations), others such as dc dux have already addressed this issue.

to argue that the deregulation of banking and mortgages--and the lack of even a central clearing house for derivatives trading, such that not only are there almost not regulations, but there isn't even a minimal transparency that would enable anyone--including a potential regulatory institution--to know what the fuck is going on within that trade---have no connection to the present crisis is like arguing that the world is flat because if you look straight ahead you don't see a curve.

Here is a quote from the article you cited:

I don't know how you can have regulations that can prevent people from violating regulations. I think most people agree that Fannie and Freddie were over-leveraged and assumed to much risk in a over-price US real estate market due for a correction.

Also from the article:

Regarding leverage at Fannie and Freddie we had regulators directing the parameters Fannie and Freddie operated under. I suppose in an odd way you can argue that lowering reserve or capital requirements is a form of de-regulation, I don't. The reserve or capital requirements are a part of the regulations in my view.

However, my original point is that "regulators" and regulations may be at the root of many corporate problems. GM for example has an average labor cost about $30 an hour higher than foreign competition operating in the US. Some existing regulations make it impossible for GM to reduce those costs to match the competition. Even with a bailout, a car czar, or whatever, GM is not going to be competitive unless they get major concessions from labor. In addition they have to be able to close inefficient and obsolete plants, regulation makes this process excessively difficult as well. GM has been dieing a slow death for about 30 years, the bailout will prolong the process not prevent it.
-----Added 11/12/2008 at 12 : 38 : 32-----
In 2008 there have been about 20 US bank failures. Indy Mac was the largest. Here is a link:

The Wall Street Journal Online - Interactive Graphics

I don't know much about banking in Canada, but in the US there are large numbers of small locally chartered banks that always have a higher risk of failure than large national or international banks.