The “Too Big To Fail” Myth
Since the 2008 economic crisis began, we keep on hearing that some companies are “too big to fail” and that “we must keep them afloat or bad things will happen.” Those who perpetuate this myth tell us of the lost jobs, and economic repercussions that will follow if we allow a large company to collapse. These claims are unsubstantiated, and in reality have a more disastrous impact on the market than anyone would like to admit. Let’s consider the points:
1) When a company becomes “too big” how do we determine that it’s “too big to fail?” No one really knows! what are the repercussions of the failure of a company that is “too big” – no one knows either.
2) Those who perpetuate this myth, make a false assumption that when a corporation fails, its assests, and people never get a job again. They also assume that the entire company is dissolved as a whole. This has never been the case in reality.
3) When the people (via the government) institute a policy of “too big to fail” we create moral hazard in the economy which will have disastrous ramifications in the future. We are essentially creating a situation in which large corporations have the ability to run amok out of the knowledge that at the end of the road, the government will always bail them out. This will cause modern day corporate board of directors and executives to further better themselves and do disservice to their shareholders. Such a thing can strike a death blow to the concept of free markets.
4) In recent decades, we have seen many huge corporations “disappear” with little ramifications. Why? the truthful answer they don’t want you to know is that when a corporation that is “too big to fail” fails, other corporations and groups get in line to buy the profitable parts of that corporations. Most of the assets and people of the original corporation change employer and the few that lose their jobs move on to other jobs. In reality this is the correct and most efficient method of economic correction in which losses are written off, inefficient staff is let go, and everyone moves on.
If we would have let AIG, GM, Ford, Chrysler and others fail, they would have been bought and trasformed within days! Let’s look at some examples:
1) Bear Stearns was sold to JP Morgan.
2) Merril Lynch was sold to Bank of America.
3) Lehman Brothers was broken up and sold to various corporations.
As can be seen, the facts do not substantiate the claim that the concept of “too big to fail” exist. It is more likely that this myth is perpetuated by politicians that pray upon the opportunity to induce panic with the public, which in turn is used to further their personal political agenda.