A few thoughts on “too big to fail”

A recent New York Times article poses the question: If it’s too big to fail, is it too big to exist? The article poses some good points which I’ll summarize as best I can:

  • We have moved past the era of many small banks, and will probably not return to it any time soon if at all.
  • Sheila C. Bair of the Federal Deposit Insurance Corporation (if you don’t know who they are, look for the FDIC sticker next time you go to a bank) argues for fees imposed on larger banks after they have been bailed out by the government.
  • The other people in the story tend to agree that allowing the taxpayers to foot the bill for large bank blunders is unsustainable long-term.

I agree that we can’t let the largest of the banks fail more than once. We must focus on prevention of future bank failures. At the same time, the possibility of a bank the size of Washington Mutual just up and failing is frightening, and would have had dire consequences for everyone, even those that do not have a bank account and deal only in cash or prepaid debit cards.

The consequences of any of GM, Chrysler, and AIG failing completely would also be rather dire. As it stands, I find the demise of GM’s Pontiac marque rather saddening given I own one of the vehicles. (As if that was not enough, my previous vehicle was a Plymouth.) Without going into specifics, we did not get through the Great Depression of the 1930s without a great deal of government intervention, and the leadership of a truly great president, Franklin Delano Roosevelt. I find it unrealistic to think that in our greatest economic crisis since that the best policy is “hands off and let the market do its thing.”

I do think that the best strategy looking forward is to keep a closer eye on the size of companies; there is a reason we have antitrust regulations, and it is entirely possible they do not always go far enough.