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Too big to fail?

post #1 of 14
9/9/08 at 7:08pm
Thread Starter 
I've been watching a lot of CNBC the last few weeks due to my current job. It's been awfully ironic, in my opinion, to watch these nimrods tout free-markets as the end all be all to production and distribution and then say companies like Freddie, Fannie and GM are too big to fail. That even if we don't want to, even if free-markets should dictate we ought to let them fail, that there's too much dependence on them, either for what they're selling or the jobs they create, to let them self-destruct.

In my mind this begs the question, why stick so stringently to your free-market idealism until disaster strikes and then call it the exception to the rule? I've been thinking about this a lot over the last couple weeks and it strikes me that there comes a point at which corporations become so big that they become institutions. When a single company is responsible for both a necessary product and necessary jobs, to the point at which their failure is unacceptably detrimental to society at large, what good is a private ownership that's unaccountable to the public it serves?

Sidenote: if GM does go under, rather than bail it out I'd rather see the government take it over and use its resources as a part of an effort to develop energy efficient/alternative fuel vehicles (assuming that's even possible using their current production facilities without having to build completely new ones).
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post #2 of 14
9/9/08 at 7:10pm
GM is no where near the level it once was. And as to these bailouts. THe logic on their end I assume is that the damage caused by their failure would create a ripple effect so massive as to create horrendous disruption to the markets would be higher than the cost of bailouts. It's to ensure some kind of confidence in the markets. Unlike the truly unregulated systems of the 19th and early 20th century.


Which I suppose why you have FDIC for example.
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post #3 of 14
9/9/08 at 7:18pm
Thread Starter 
Quote:
Originally Posted by EdHocken View Post
THe logic on their end I assume is that the damage caused by their failure would create a ripple effect so massive as to create horrendous disruption to the markets would be higher than the cost of bailouts. It's to ensure some kind of confidence in the markets.
Sure. I get the cost/benefit calculus going on here. The problem is that free-markets will at times allow companies to grow to a point at which their failure, regardless of free-market principles governing said failure, costs too much to the public to allow. That sorta undermines the ideal of a laissez-faire economy.
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post #4 of 14
9/9/08 at 7:25pm
Quote:
Originally Posted by JuddL View Post
In my mind this begs the question, why stick so stringently to your free-market idealism until disaster strikes and then call it the exception to the rule?
GM, for example, didn't get where it is solely through the free market, it got where it is by using government to get special legal status, to get favorable contracts, etc. So you can say that the government created this problem and therefore should have a hand in fixing it. Or you can take the opposite approach and say that the government should stop helping companies into these messes in the first place. Neither one, though, disproves the free market.

</theoretical argument>
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post #5 of 14
9/9/08 at 7:26pm
Quote:
Originally Posted by JuddL View Post
Sidenote: if GM does go under, rather than bail it out I'd rather see the government take it over and use its resources as a part of an effort to develop energy efficient/alternative fuel vehicles (assuming that's even possible using their current production facilities without having to build completely new ones).
You need to get into politics, JuddL.

ps. on the free market ideology cult, it serves who it serves and operates under a fantasy that it's not catastrophic to the people who bear it (which it is). When institutions fail, those who benefited pay no price. Only the rest of us pay a price, and obviously the politicians who belong to the free market cult or aren't bold enough to break from the pack aren't really worried about us figuring it out.
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post #6 of 14
9/9/08 at 7:27pm
Quote:
Originally Posted by JuddL View Post
Sure. I get the cost/benefit calculus going on here. The problem is that free-markets will at times allow companies to grow to a point at which their failure, regardless of free-market principles governing said failure, costs too much to the public to allow. That sorta undermines the ideal of a laissez-faire economy.
I understand the point. The other thing worth mentioning as James pointed out and especially in relation to Fannie/Freddie is that these aren't just regular corporations but really strange quasi-corporate entities set up by the feds. (I can't say much further because I never got into their respective histories.)
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post #7 of 14
9/9/08 at 7:29pm
Quote:
Originally Posted by yt View Post
You need to get into politics, JuddL.

ps. on the free market ideology cult, it serves who it serves and operates under a fantasy that it's not catastrophic to the people who bear it (which it is). When institutions fail, those who benefited pay no price. Only the rest of us pay a price, and obviously the politicians who belong to the free market cult or aren't bold enough to break from the pack aren't really worried about us figuring it out.
I take it you have read The Shock Doctrine by now.
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post #8 of 14
9/9/08 at 7:33pm
Quote:
Originally Posted by Jan View Post
I take it you have read The Shock Doctrine by now.
Still only about a quarter of the way through. I did try over this past weekend, but it's so goddam disturbing.
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post #9 of 14
9/9/08 at 7:34pm
Quote:
Originally Posted by yt View Post
Still only about a quarter of the way through. I did try over this past weekend, but it's so goddam disturbing.
It is. But it wont get less disturbing but rather more infuriating. At least up until page 300, where I am at right now. But I think it is mandatory reading given the current state of affairs nowadays.
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post #10 of 14
9/9/08 at 7:38pm
Quote:
Originally Posted by Jan View Post
It is. But it wont get less disturbing but rather more infuriating. At least up until page 300, where I am at right now. But I think it is mandatory reading given the current state of affairs nowadays.
Agree. I'll work on it more tonight.
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post #11 of 14
9/9/08 at 10:00pm
Some are too big to fail, but when the economy starts to down-turn across the board, you can't save everyone...

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post #12 of 14
9/9/08 at 10:47pm
a company like GM, Ford or even Walmart (largest employer in the US) are too big to fail. They simple are to big of a part of the economy not to be held up by the government. As one of them collapsing isn't just them, it's 100's of industries in ways we can't even count.
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post #13 of 14
9/9/08 at 11:02pm
It' s not an economic issue; it's a politcal issue. As noted above, all three organizations you cite were either created by the Federal government and/or heavily subsidizied.

Freddie and Fannie are really disturbing: they were created to give lower income folk the chance to become home owners by providing loans at reasonable rates. I don't know the details behind how they got involved in the subprime mess. The fact that they did, and need to be bailed out is really bad.

Normally I'd say "let 'em fail": the problem here is that there is a fundamental issue of trust; if you buy loans or do any business with a US Financial institution, can you trust them to 1) behave ethically 2) meet their obligations 3) not piss away your money. Right now that is an open question

Earlier this year there were rumours that the Chinese Government refused to have anything to do with Lehman, causing a huge decline in their stock price. It does not help matters that the CEO of Bear Stearns got on CNBC to state unequivocally that Bear was solid as a rock, only to see the firm implode one week later!
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post #14 of 14
9/9/08 at 11:11pm
Thread Starter 
Fannie, Freddie and GM(?) are not the only big bail-outs over the last 10 years. They're just the most current. It's a recurring trend during economic downturns.

In the mean time, the CEOs of Fannie and Freddie are receiving 9 and 14 million dollars in compensation for all their blood, sweat and tears. This country can be a sick place.
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