How Big is "Too Big to Fail"?

Champs

Tue Jul 22 20:13:16 -0700 2008

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Over time, every empire declines and fails, but the US is far from the latter.  However lousy the present situation happens to be, it takes far more to cause the collapse of many lesser nations.

How Big is "Too Big to Fail"?

President4242

Tue Jul 22 20:35:05 -0700 2008

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Over time, every empire declines and fails, but the US is far from the latter.  However lousy the present situation happens to be, it takes far more to cause the collapse of many lesser nations.

That depends only upon how well they "control the message", which thanks to the internet, is getting more out of control all the time.  Many "superpowers" of the 17th and 18th centuries fell on rumors FAR less substantiated than the collapse of the US Dollar.

How Big is "Too Big to Fail"?

President4242

Tue Jul 22 20:33:41 -0700 2008

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Here's my two competing theories:

1.  If the government still is able to borrow money, AND your business has in the past provided enough campaign fund donations to be known by a lot of politicians, and somehow they can paint your bailout as protecting consumers when it is really protecting investors, then your business is too big to fail.

2.  If the government runs out of money to borrow, all bets for #1 are off.

too big to suck dry?

rubycodez

Wed Jul 23 13:33:30 -0700 2008

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since the government borrows and bails, the question really isn't about "too big to fail" but are the taxpayers too big a group to bleed dry with interest on those loans.

 

the patient is down and sick and we choose to tap him for some more transfusions.

How Big is "Too Big to Fail"?

Eric Howe

Tue Jul 22 21:22:57 -0700 2008

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Here's a different take on the situation. Xenakis does have a bit of a Cassandra Complex but he makes more sense than the other commentators.

Executive summary: It is 1929 all over again but the US gets to play Germany this time and China gets to play the US.

How Big is "Too Big to Fail"?

Uncle Entity

Wed Jul 23 02:39:28 -0700 2008

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They seem to be picking and choosing their data to support their 'generational failure' theory.

Approximately every seven or eight years there has been a market crash. The main difference today is that ever since the US declared bankruptcy in '71 they have been inflating through the business cycles and have built a bubble that has no equal really. They also did this before but always had the gold standard to keep a lid on things even if it was only valid for international accounts.

Before the Keynesian Revolution the government pretty much just stayed out of the way (other than allowing banks to supend specie payments) and let the malinvestments get liquidated, usually took less than a year for everything to work itself out, but since the crash in '29 they have been interfering to insure that prices don't fall as a result of the level of money in the system decreasing due to the artificial inflationary credit going *poof* and also pump a whole lot of 'liquidity' into the market to ensure that businesses that were only profitable under cheap credit keep getting a steady supply of cheap credit to stay afloat.

Eventually the chickens come home to roost and the results of such an inflationary policy becomes undeniable even to the most hardened monetarist.

How Big is "Too Big to Fail"?

Eric Howe

Thu Jul 24 08:08:49 -0700 2008

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There is a qualitative difference between the dot-com crash and the 1929 crash. The mini-crashes every decade or so are minor affairs, the big ones are market- and world-wide and cause real damage.

How Big is "Too Big to Fail"?

Charles E Hill

Tue Jul 22 22:45:35 -0700 2008

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Well, you have to be bigger that Number 12 on the list if you're a private company.

Section: [Jobs] ?

Morosoph

Wed Jul 23 04:10:00 -0700 2008

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Funny how I get to choose the section that my reply will be posted under :P

I thought that the advantage with capitalism was that by allowing failure on the small scale, you could avoid slow poison on the larger scale.  Failure is an important part of the dynamic.

All the same, if these mortgage companies are to be rescued, shareholders should lose out, and poor (or unlucky) decision-makers need to be sacked, and not allowed a job of the same seniority for a few years.  Those who argued strongly against policy should not be sacked, although any promotions should be for general competance, rather than caution per se.  Although such sackings are potentially unfair, a culture of being insulated by going with the majority has replaced a culture of falling on your sword, and (mostly institutional) shareholders are very happy with this, since their own membership are empire-builders rather than profit-seekers.  Such a culture creates positive feedback in the system, and makes the markets considerably less efficient.

By having government buy up shareholder certificates cheap, refinancing, and reselling the certificates in tranches (exercising no or few voting rights that end when the last tranch is sold), shareholders will be suitably punished.  The sackings are in the government power as its one executive act, but to deny those who follow the herd jobs of equal seniority is harder, given that they've broken no law, and that their risky "conservativism" will be valued at other institutions.  Should Congress pass a law especially?  The costs to freedom of association and economic judgement are great indeed, and yet the culture of conformity is an immense and continuous risk.

In my estimation, Congress would not get such a law right in any case, since the source of the problem is hierarchy and politics.  Hierarchical systems favour those qualities that promote hierarchical systems, and the individual safety of conformity is one of those qualities that such systems tend to promote.

Perhaps there is a common law solution, but I doubt that too:  our psychology is to blame the one who differs from the herd;  we do not see the conformist as taking a risk, or of enhancing a systemic risk.

Given the problems of enforcing accountability, outright failure is probably the best option.