September 17th, 2008

The Bigger They Are, The Softer They Fall


photo credit: danny_kino

Yes, it’s true. One of the oft-imparted nuggets of wisdom we learned in our youth no longer holds true in today’s world. “The bigger they are, the harder they fall” has taken a 180 degree spin, teaching children everywhere that if you’re really big, you can’t possibly fail.

At least, that’s what we’ve been told. With corporate bailouts, the nationalization of mortgage and insurance companies, and massive taxpayer-funded loans being offered only to the largest of financial institutions, the line we’re fed by the puppeteers is that these companies are too big to fail.

Too big to fail?

Well, it’s not exactly that they can’t fail; instead, their argument is that they should not be allowed to fail. Putting on their self-granted prophetic mantle, these power brokers claim that if these companies were to fail, the economy would self-destruct, home prices would tank, and jobs would be eliminated. The complicit media goes along for the ride, echoing the same arguments ad nauseam. Apparently we haven’t yet learned that these people are some of the most untrustworthy, inaccurate, and unprophetic that exist. Why do we continue to believe them?

Implied in the argument that big companies should not be allowed to fail is the idea that the services they render are so sacrosanct as to be immortalized through theft of the average taxpayer. The Federal Reserve—sugar daddy extraordinaire—harnesses its eternal sagacity and arbitrarily determines which companies shall be rescued with your money. Such wisdom, such foresight!

Perhaps the textbooks on conventional wisdom need to be rewritten to reflect the new way things are done. Fear not, children of America: so long as you are well-connected and important, you will never fail! (Until Uncle Sam withers away, that is…)

40 Responses to “The Bigger They Are, The Softer They Fall”

  1. Matthew Piccolo
    September 17, 2008 at 12:58 pm #

    Thanks for pointing this out. It made me feel sick this morning when I heard that the feds are bailing out another corporate giant.

    One of the most important aspects of a “free market” is that the weakest businesses get weeded out and better ones pick up the slack and improve things. Bailouts give us a temporary sense of security but only deflate optimism for the future that could be.

  2. Connor
    September 17, 2008 at 1:03 pm #

    One of the most important aspects of a “free market” is that the weakest businesses get weeded out and better ones pick up the slack and improve things.

    Exactly. Free markets are by their nature a profit and loss system. If you remove either component (profit in communism and its sister -isms, or loss in corporatism), then you’ve got an entirely different beast. Companies have to be able to fail in order to have moral profit. AIG getting $85 billion from taxpayers (as just one example of the recent economic havok) is hardly grounds for doing honorable business.

    Bailouts give us a temporary sense of security but only deflate optimism for the future that could be.

    I’m not sure that they even given a temporary sense of security. The markets react favorably for a day or so (some of the time), and then continue their downward trends. When the actions are superficial, they won’t abate the direction this train wreck is headed.

    Also, I think the only partial sense of security granted is to the people getting the money. Employees of these companies rest a little easier at night, I’m sure. The rest of us grow poorer each day.

    God bless the USA (despite how many people are making a mess of it…), right?

    Ugh.

  3. David
    September 17, 2008 at 1:12 pm #

    I’d like someone to take a hard look at what would actually happen to the economy if AIG, Fannie, Freddie, and Bear Stearns all failed.

    If Fannie or Freddie holds my mortgage it does not mean that I will lose my house, it means that I will have to start sending my payments to someone else. If AIG holds my life insurance then I no longer pay my premiums to them. I either select another insurance company (and risk the possibility of higher premiums) or I picket that extra money each month. If I had a whole life policy I may lose the cash value but if I was wise in my personal finances I would not be banking on that cash value anyway.

    In the case of any or all of those failures the value of stocks will drop, but most people hold no stocks or stock-based assets and for those who do, there is no actual loss until you cash out.

    Admittedly those who are directly employed by these companies stand to lose their livelihood and pensions etc. but those could be salvaged by the government for well under the price of the current rescue efforts.

    So what about a worst case scenario – where banks are failing around the country and 60% of the population has lost their jobs. Any ideas?

    On the other hand, lets look at the bailouts – do they actually hurt us worse in the long run? The debts adopted by the government in bailing these companies out are going to have to be repaid with interest in generations to come and the money being used to finance those debts is not American money.

  4. Mark N.
    September 17, 2008 at 1:30 pm #

    Recent emphasis (in my experience, anyways) in Church teachings about the Atonement which use the concepts of debt and debt forgiveness being obtainable only by the intervention of a third party suddenly seem rather prescient. Take that, and the idea that the Republican party represents those who tend to favor “justice” whereas the Democratic party might be viewed as being those who tend to favor “mercy”, all we need now is our Mediator to step in and save the day.

    If only.

  5. Adrien
    September 17, 2008 at 1:32 pm #

    Politically, Uncle Sam cannot afford not to bail out these companies. If they allowed the creditors of these companies to get wiped out, the credit crunch would be more intense than it already is. Even if you do not do business with any of these companies, the economy relies on the same creditors to fund capital investment which leads to growth. Further constraining this capital would only make investment for other companies much harder, which in turn makes growth harder, which builds the case for companies to cut payrolls in order to try to maintain margins.

    Believe me, I am not in favor of such bailouts. As an econ major, I understand that this is how capitalism goes – profits are driven to zero, losers get bought on the cheap, and the survivors live to boom again until profits are exhausted again. The problem is that we have tried to control this cycle and have not allowed the callous market work. So, we keep putting off the inevitable losses because nobody wants to see the correction happen on their watch.

    As long as we have a trade deficit, this is ok. A trade deficit means that we buy more than we sell. The people selling to us are not buying as much from us but they are also not sitting on hard currency. They put the dollars to work using our treasuries. This increased demand for treasuries props up the price of these securities, maintaining cheap interest rates while allowing us to spend without raising taxes (because we can borrow cheaply).

    If, for some reason, these countries stop buying or choose to sell our treasuries, the price of treasuries will fall, pushing up interest rates. So our borrowing costs will increase as well as our tax rate just to maintain our spending.

    One way or another, this pseudo market will stop. Maybe the end is here. I don’t know how we can both cut back on our imports, as many are calling for, AND keep spending the hundreds of billions of dollars on war and bailouts. How much more furnature do we have to throw on the fire?

  6. Gabriel
    September 17, 2008 at 1:37 pm #

    Adding injury to insult, the government blames the “free market” for these failures as justification for its intervention. Not many people realize that it was and is government intervention that creates these problems in the first place.

    The book, The Creature from Jekyll Island, written in 1995 by G. Edward Griffin, details with remarkable accuracy how the Federal Reserve has created the current fiascos we are seeing. The Federal Reserve is at the heart of each of these bailouts and one of the main causes of current economic conditions.

  7. Connor
    September 17, 2008 at 1:39 pm #

    Not many people realize that it was and is government intervention that creates these problems in the first place.

    I shared this quote in a comment a few weeks ago, but it applies so well here:

    Government is a disease that masquerades as its own cure. (Robert Lefevre, via Quoty)

  8. David
    September 17, 2008 at 1:39 pm #

    If they allowed the creditors of these companies to get wiped out, the credit crunch would be more intense than it already is. Even if you do not do business with any of these companies, the economy relies on the same creditors to fund capital investment which leads to growth. Further constraining this capital would only make investment for other companies much harder, which in turn makes growth harder

    All of that relies on the assumption that economic growth is a necessity. I’m beginning to think that focusing on growth as our measuring stick is destructive. (I am not trying to argue that growth is destructive, just the government single-mindedly focusing on economic growth.)

  9. Adrien
    September 17, 2008 at 1:54 pm #

    Name a company that plans and hires with zero growth in mind. Im not talking about GDP growth. I’m talking about a company’s ability to grow. They plan to grow. When they can’t they cut jobs.

  10. Adrien
    September 17, 2008 at 1:55 pm #

    Neither presidential candidate has ever studied economics or operated a business.

  11. Yin
    September 17, 2008 at 2:11 pm #

    Very good post. You know how I know it’s a good post? I had to use the dictionary, like, three times. :)

    Seriously though, good post.

  12. David
    September 17, 2008 at 2:27 pm #

    I could name a couple of companies, but you would never have heard of any of them. Still, there is a difference between a company focusing on growth – that drives innovation – and a government focusing on growth – that just makes us run away from every economic contraction and make poor decisions like arguing that there are companies that are “too big to fail.”.

  13. Adrien
    September 17, 2008 at 2:37 pm #

    Ok well the point is that AIG isn’t too big to fail because of its global reach in service. It is too big to fail because of the risk its failure poses to the credit market. With the decimation of the credit market, the job market would get even more busted. Which politician is going to be responsible for letting AIG fail, increasing unemployment because companies are overweight in headcount because they cannot grow? Not one. . . which is why they say AIG is too big to fail and they bailed them out. They bailed the creditors out – the shareholders are all but wiped out.

  14. Adrien
    September 17, 2008 at 2:46 pm #

    http://online.wsj.com/article/SB122164849424947571.html

    This is an article I came across after Connor’s post. It does a good job of illustrating what the credit crunch means. Soured credit bets and a lack of liquidity. It would be much worse if AIG were to default on its obligations.

    Also, another example of why things are too big to fail are the freddy and fanny troubles. What if they did fail? What if they stopped lending for mortgages? What do you think the real estate market would be like if either interest rates were twice as high due to the lack of lenders or there was no money to be had for mortgages? Are there enough buyers with hard cash to boost demand and support the current housing price levels? If there is no money to borrow, there are fewer buyers. Fewer buyers mean prices go down and the spiral continues. I’m not saying I prefer to bail these guys out. Frankly, I prefer lower real estate values because I don’t own. . . yet. But which politician is going to allow this depression to happen?

  15. Connor
    September 17, 2008 at 2:52 pm #

    It would be much worse if AIG were to default on its obligations.

    For whom?

    I really think that we’re just prolonging the inevitable (or dragging it out, suffering longer that we otherwise would). I’m all for pulling the plug and letting the insolvent companies fail so we can begin to do things right. It’ll happen sooner or later. Might as well be sooner, IMO.

  16. David
    September 17, 2008 at 2:57 pm #

    I’m with Connor – it might as well be sooner. I do own my house (not outright, but I’m not renting) and I still would prefer to have home values fall rather than pay for these bailouts for the rest of my life (through taxes). The only way lower home prices hurt me is if I move, or try to get cash out of my home. I don’t plan on moving and getting cash out of my home is not a wise economic plan even in good times.

    I do concede that Adrien is right that no politician (besides RP) is going to let such an economic shock occur if they can help it – even if they have to make really bad economic choices.

  17. Adrien
    September 17, 2008 at 2:58 pm #

    The current state of the credit market would be worse than it is. Did that really need clarification?

    It would be good for guys in my business though.

  18. Connor
    September 17, 2008 at 3:00 pm #

    The current state of the credit market would be worse than it is.

    I’m not so sure that that would be a bad thing…

  19. Adrien
    September 17, 2008 at 3:10 pm #

    OK, so it’s clear that we agree it wouldn’t be a bad thing in our opinion. But you have to tell a lot of people that there are fewer jobs and that they owe several thousands of dollars more on their homes than their homes will be worth in this lifetime. I don’t think that policy gets you re-elected. I think Ron Paul is the only one who can pull that one off. We really can’t expect any of the other politicians to stand up for it because it is a losing strategy. The constituency doesn’t want the truth – they want hope no matter how futile.

  20. Connor
    September 17, 2008 at 3:11 pm #

    The constituency doesn’t want the truth – they want hope no matter how futile.

    Gives new meaning to Obama’s “Change we can believe in”. Perhaps people have been interpreting that to mean pocket change. :)

  21. Adrien
    September 17, 2008 at 3:13 pm #

    Ha. . . the people don’t know how to interpret it. That’s why he’s so popular. If only they truly understood the negative impact his policies would make. . .

  22. Daniel
    September 17, 2008 at 6:03 pm #

    Conservatives are typically pro-market and anti-regulation, if I may generalise.

    That is, they’re against the government regulation that might have prevented this catastrophe in the first place.

    How’s that working?

  23. adrien
    September 17, 2008 at 6:34 pm #

    I don’t know if you noticed, but we haven’t had real conservatives around since the 60s when Goldwater was running. The so-called religious right doesn’t really fit the bill of a pro-market capitalist.

  24. Daniel
    September 17, 2008 at 8:43 pm #

    There haven’t been any True Scotsmen either.

    And Communists say that pure Communism has never been tried.

    It’s a nice song, but you get none of my spare change.

  25. adrien
    September 17, 2008 at 8:59 pm #

    Close but no CIgar. The religious right really aren’t the traditional conservatives. As Ron Paul points out, they have been pushing for more and more laws (the whole gay marriage thing as well as the whole carding people under 40 for beer in Arizona), they have been promoting policing the world, and increasing government spending. In what way are the religious right conservative?

    Communism really has never been tried.

  26. adrien
    September 17, 2008 at 9:04 pm #

    Oh yeah, I forgot bigger government with Homeland Security.

  27. Daniel
    September 17, 2008 at 11:37 pm #

    I thought the religious right were considered conservative because they have small-town values and don’t eat funny lettuce.

    But are you saying our good host Connor isn’t a real conservative because he’s pushing for laws against gay marriage?! Now I’m confused.

    Let’s go to the horse’s mouth. Now where can we find some religious right people? Maybe right here!

    Hey, religious right folks! Adrien here says you’re not real conservatives. Are you?

  28. adrien
    September 18, 2008 at 5:16 am #

    Oh yeah, I forgot that being politically conservative means having small town values. What was I thinking?

  29. Kelly W.
    September 18, 2008 at 7:18 am #

    I think the current economic collapse of the world’s largest economy was prophesied many years ago. Please read chapter 18 of the Book of Revelation.

  30. Kelly W.
    September 18, 2008 at 8:09 am #

    This week’s Gospel Doctrine lesson is about Helaman 13 to 16. This is where Samuel the Lamanite prophesies to the wicked Nephites about the curses that will come to them before the coming of Christ to the world if they did not repent.

    President Benson told us the conditions of the Nephites would mimick our own day before the Second Coming.

    Samuel told them of the main curse to come, that their treasures and money would become “slippery” to them. They would bury up their treasures, but they would be gone the next day.

    I believe that is exactly what is happening before our eyes. People will bury up their riches in Lehmann or AIG, and the next day they’re gone.

    Samuel told the Nephites how to avoid this slipperyness. They should bury up their riches unto the Lord who gave them the riches, instead of burying them up to serve their own vanity.

    Are the current economic failures directly related to our own wickedness and failure to bury up our riches unto the Lord, which thereby activates the blessing/curse of the B of M upon the land?

  31. Connor
    September 18, 2008 at 10:07 am #

    Hey, religious right folks! Adrien here says you’re not real conservatives. Are you?

    Religion != Conservatism.

    Besides, the epithet “conservative” has been so misused as to be rendered void of any inherent meaning. The same applies to “liberal”, which has been neutered of its original definition and applicability.

  32. Adrien
    September 18, 2008 at 10:25 am #

    Ok then, which religion is deemed to be the right one for conservatism?

  33. Brian Mecham
    September 19, 2008 at 2:35 am #

    I wrote a complimentary post on my blog about corporate bailouts and being allowed to fail and succeed without government intervention.

  34. Frank Staheli
    September 19, 2008 at 3:34 pm #

    Adrien,

    You said that it would be worse if AIG were to default on its obligations. IT HAS BEEN DEFAULTING ON ITS OBLIGATIONS FOR MONTHS AND MONTHS ALREADY. It is time to stop the rapine, because it will only get worse if we continue to allow the Republican AND Democrat shysters in government to bail out their friends. This bailout will not help the average you and me. It only further lines the pockets of those who are in the know.

    Can I have part of AIG’s bailout money to replace the $9,000 my retirement account has lost in the last 3 days?

  35. Hoot Gibson
    September 20, 2008 at 3:40 am #

    A good time it seems, for Americans with a boatload of “unsecured” debt to say, “Screw It”. And dump them back into the credit card/banks hands. After all, won’t the Government bail us out as well?

  36. Kelly W.
    September 20, 2008 at 10:20 am #

    Hey, if the USA is broke, can we quit funding the wars? I think the Iraq War alone is costing us about two billion dollars per week.

  37. Daniel
    September 21, 2008 at 4:02 pm #

    From Hilzoy of the Washington Monthly.

    “First: throughout all this, I’ve been torn between believing in market discipline and wanting to avoid moral hazard on the one hand, and thinking that of course that commitment flies out the window if we’re seriously threatened with economic collapse, on the other. But it’s worth remembering that we could have avoided having to choose between these unfortunate options. All we needed to do was have people in government who believed in good regulation.

    “Second: if anyone ever tells me that Republicans are the party of fiscal discipline ever again, I will either dissolve in laughter or bite their heads off. I don’t know which. You have been warned.

    “Third: in particular, if any Republican ever tells me that a hundred million or so is just too much to pay to make sure that kids have health insurance, I will definitely bite his or her head off.

    “Fourth: I do not want to hear people tell me that regulation cripples the economy, unless they are willing to admit that a lack of regulation can also cripple the economy. Not ever. I don’t understand why anyone is so much as tempted to think that “regulation” is good or bad, as a whole: to me, that’s like being for or against “things” or “people”. Some regulations are good, some are bad; obviously, we want people in government who can tell the difference, and implement regulatory systems that work well. However, altogether too many of my fellow citizens were willing to listen to ideologues, and now we all get to pay for their mistakes.

    “Fifth: if Obama wins, he and the Democrats will, in all probability, have to be the grownups once again. Reagan spent us blind; Clinton got us out of debt again. Now Bush has spent us even blinder, and we will be tempted, yet again, to put our ideas and aspirations on hold for the sake of the country.

    I would like to hear one Republican, just once, acknowledge this fact.”

  38. Mark N.
    September 22, 2008 at 2:31 pm #

    Back in 1999, I voted for Bush-Cheney, being disgusted with the shenanigans that Clinton had put us through, thinking that with Cheney in there, there might actually be some “grownups” in charge of things for a change.

    Boy was I wrong. Needless to say, Bush-Cheney did not get my vote in 2003. (With the Electoral College being what it is, and with California being what it is, I can say that my Bush-Cheney vote in 1999 was negated by my fellow Californians, which has consoled me to a certain extent.)

    However, it definitely makes me wonder if I am capable of identifying the “grownups” in any given election.

  39. Daniel
    September 22, 2008 at 7:37 pm #

    Well, don’t be too hard on yourself. At least you were able to change your mind in 2004. That’s always difficult, and many people couldn’t manage it. I seem to remember that Utah went for Bush county for county, which I’m still scratching my head over.

    In fact, we could have used a few more of you in Ohio.

  40. Adrien
    September 23, 2008 at 12:24 pm #

    My favorite quote of the day:

    “Just because God created the world in seven days doesn’t mean we have to pass this bill in seven days,” said Rep. Joe Barton, R-Texas.

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