Too Big to Fail

September 25th, 2008 by Rick Drain

Too Big to Fail–テつ means Too Big to Allow.

In our complex society, we have two choices:

1)テつ Cap the size and scope of institutions or systems so that their private blunders could not become our collective catastrophe, or

2) テつ Plan ahead for the orderly breakup of any system that gets dangerously big.

Either have a Plan B, or ban Plan A.

I like to recall the example of the fall of WorldCom.テつ In 2002, they were the USA’s second-largest phone system and ran the backbone data links for the Internet worldwide.テつ When their accounting scandals made failure likely, the cry went up of “Too Big to Fail.”

That turned out not to be the case.テつ WorldCom the company did fail, wiping out the shareholders and most of the bondholders, and even failing to pay some of the trade debt to their suppliers.テつ However, the bits went on.テつ The bankruptcy court put managers and rules– a plan– in place to keep the telecom systems from missing a beat, much less failing.

The only way to keep all the other companies responsible and diligent and prudent is to make sure that the imprudent, careless, or irresponsible companies pay the cost of their failure.テつ ANY other concept will be an explosively self-destructive system of private gain and public loss.

Note that according to the (now tarnished) ideas of un-government-regulated capitalism, the effectiveテつ regulating force is supposed to be the fear of failure among the company’s management, as well as their lenders, suppliers, and even their customers.

Supposedly, it is the vigilance and skepticism of all the interacting players that should keep a company responsible.テつ All those players will only make that effort if they know that they, too, will be hurt by a failure.

Now, just to close the circle:テつ Suppose all those interacting players were to get together, hammer out a set of rules, and set up a separate organization specifically to inspect their business partners and enforce those rules.テつ That would be much more cost-effective than having everyone performing duplicated inspections and enforcing conflicting rules.テつ Sounds good?テつ Just don’t call that mutually-supported organization a ‘government,’ or those mutually-agreed rules ‘regulations,’ or you’ll have the free-market folks screaming at you.