04 December 2008

From Boom to Bust(ing up big companies)

Eliot Spitzer demonstrates over at Slate why I was so grieved when we lost him to libido. Given the importance of financial markets, it seemed to me that his savvy about them was incredibly valuable to good government.

Spitzer says that the "too big to fail" model for banks is the problem and that rather than prop them up with subsidies, we ought to let them fragment into smaller pieces.

Yesterday, I had an exchange with my cousin Scott and he suggested the same thing about the auto industry. Let the little start ups offering new and innovative (and typically more green) designs take market share from the Big 3. (Look at this little Aptera, made by a company here in San Diego County, that gets 300 mpg, for instance.)

For autos and finance the future is uncertain. What kind of models will work best? What kind of financial products are innovative and which are merely reckless? What kind of cars will work to alleviate congestion and pollution? And even we could define these products, what kind of company could best provide the whole package (from employees to prices to support infrastructure) to best deliver those products?

Given so much is uncertain, it is best to have lots of experiments running right now. The Big 3 and the big banks could, in theory, run those experiments, letting various divisions and groups take their shot at creating a new future. But one of the many problems with CEOs making so much money is that they seemingly feel obligated to earn it. They review and judge the various plans from within the company, effectively running everything through the same filter - making the company one really big test of one theory rather than lots of small tests of many theories.

Given the financial crisis, Obama has been compared to FDR. What if, instead, the better model is the brash Teddy Roosevelt who broke up big companies, forcing competition into industries that made a few rich but did little for the rest of the country? He could do worse than accept this argument from Spitzer:

But even more important, from a structural perspective, our dependence on [financial institutions] of this size ensured that we would fall prey to a "too big to fail" argument in favor of bailouts.

Two responses are possible: One is to accept the need for gigantic financial institutions and the impossibility of failure—and hence the reality of explicit government guarantees, such as Fannie and Freddie now have—but then to regulate the entities so heavily that they essentially become extensions of the government. To do so could risk the nimbleness we want from economic actors.

The better policy is to return to an era of vibrant competition among multiple, smaller entities—none so essential to the entire structure that it is indispensable.

The concentration of power—political as well as economic—that resided in these few institutions has made it impossible so far for this crisis to be used as an evolutionary step in confronting the true economic issues before us. But imagine if instead of merging more and more banks together, we had broken them apart and forced them to compete in a genuine manner. Or, alternatively, imagine if we had never placed ourselves in a position in which so many institutions were too big to fail. The bailouts might have been unnecessary.


Anonymous said...

people are frightened of that kind of change. most people would rather the system they know, no matter how imperfect, over an unknown.

Anonymous said...

Jimmy Carter was the last president who even tried to enforce the antitrust laws. Corporate consolidation began under Reagan, and accelerated under Clinton.

George W is going to get all the blame for this recession, but really it's the result of several decades of bad decisions.

Will "take no prisoners" Hart said...

Good point by Thomas. Damned if there isn't in fact a hell of a lot of blame to go around.

LSD said...

This is an interesting issue. It seems that most people I hear talking about the bail-out of the big three are open to the idea of letting them take their lumps.

-Could it be that congressmen and the people employed by these companies constitute a strong enough contingent to deliver the money? If so, I would expect that congress' approval ratings sink further and the moral of the governed sink with it.

LSD said...

This is your blog and that, of course, means you get to arrange things, but good grief; you put me right next Eliot! (Yes, I noticed.) Is this because I made unsympathetic utterances during his 15 minutes of shame?

At any rate, you have provoked me and so I will take the rest of my momentum in a good direction by saying that this issue surprises me in that most people seem to be in favor of letting these companies take their lumps. I suppose that a minority consisting of congress and other people with direct financial interest in Detroit's big three is all that is needed to deliver the money. I also guess that congress' approval ratings and the moral of the governed will drop because of this and that ultimately this bandage will only encourage and enable bad business and possibly foster a more dramatic failure as the 'bandage' insulates the bosses from changes that would otherwise occur.

I think the money should go to architects.

Anonymous said...

Why don't the big three auto companies just go talk to the big banks that got a 700 billion dollar bail out to do exactly what the big 3 are asking the government to repeat again?!

Ron Davison said...

I think that one thing the status quo always has going for it is that it requires little effort to maintain.

A financial situation like this has roots back decades. It is true that when it comes to consolidation there has not been much difference between the parties or presidents in the last few decades.

Will Hart,
lots of blame could be construed to mean lots of material for posts. And the revenues from that ought to be enough to get the economy going again.

I'll vote for architects, but you guys have to promise to accelerate this trend towards interesting buildings rather than those boxes they "designed" for decades.
I do think that the politicians have to be glad right now that it is a two party system and that voters think that they have only one of two choices.

Have the car companies get money from the banks that just got money to stimulate the economy? Isn't that too obvious?