Last year the mainstream media was promoting the following logic – in the US there are some banking institutions which have become so large and important in the financial world that they are “too big to fail”. The implied threat is that if they were allowed to fail, the entire system would go down with them, ending “life as we know it”. So, what to do about this? Well, we were told in the same breath the right thing is to supply them with almost unlimited money, from the taxpayer, until the problem somehow resolves itself. The workings of this momentous handout are a secret, to protect the recipients – it’s part of the deal. We have been loosely reassured that there is a likely upside to any loans made, but almost nobody believes this and it is entirely besides the point.
The point, which has been studiously avoided, is that no company or branch of government should be “too big to fail” to start with. If it is in this category it needs to be made smaller, so that it can fail without the risk of systemic collapse. I am not aware of any meaningful plan to do this to any of the “too big to fail” bailout recipients.
The risk of failure, and the “creative destruction” is a critical component of capitalism. It cleans out the system of bad businesses and poor ideas/execution. It is an evolutionary process – with the survival of the fittest – resulting in an improving pool of businesses. It is punishment for bad business.
The “too big to fail” idea hides the deal you make with the devil. You may avoid the “fail” with a bailout, but the cost is greater than the dollars. The trouble is, throwing money at them is doing nothing to heal them (they have already effectively failed) and in fact it provides a barrier to other businesses who might otherwise have replaced them with better business models and practices. It rewards businesses using unsustainable business models, hell bent on growth. It is a major spanner in the works of capitalism.
Once one company gets away with this technique of claiming to be “too big to fail”, all the big boys try it. This is the “moral hazard” pitfall that is also rarely fleshed out in public debate. A market leader in any major industry (finance, car, insurance, airlines etc etc) races to become the biggest, no matter what it takes, so that they can get the infinite protection from the government.
"I've abandoned free market principles to save the free market system." --George W. Bush, Washington, D.C., Dec. 16, 2008. Sadly he didn’t save the system at all, but simply assured it’s destruction by meddling with it. Obama has only multiplied his mistakes.
The real problem is, of course, that the whole system is now so corrupt and dysfunctional that it is not going to heal itself (as I believe a proper functioning capitalistic system would). I believe we are in a spiral that will now only resolve once a huge reset has occurred. This is likely to be in the form of economic collapse, leading to massive political and social unrest and change. Violence, in many forms, may occur – and control is already gained or being sought via means such as under the guise of “anti-terrorism” laws. The elite in power are frantically setting things up so that when the now-inevitable shit hits the fan they are protected in some way. The only fear they really have is that chaos ensues and they lose all semblance of power.
So when will a crisis occur? There are many possible sparks that can start that fire, and when things are hotting up it can be something seemingly quite insignificant at first. For example, World War II started in earnest with the assassination of Archduke Franz Ferdinand of Austria. I doubt many Americans at the time thought that event was going to draw them eventually into a world war.
History lessons aside, my suspicion is that the chaos will be sparked but a sudden deepening financial crisis – centred in the US. My belief is that this could be linked to the ongoing bankruptcies of states of the USA, and the pressure on them from rising unemployment benefit payments coupled with reduced tax receipts. Assuming that other nations start to baulk at the seemingly never ending deficit spending, at some point something will have to give somewhere. A currency crisis will put the world in turmoil. This is when the illusion of normalcy will tear, and history will start on a new course. I can see this happening relatively soon, and it will be shocking.
The problem with capitalism is that it walks on a fairly thin line. With continued growth the margin for error becomes smaller and smaller, and eventually something major goes wrong. The checks and balances have been removed to prevent this, and a spiral into ever worse circumstances has been initiated. If any component is too big to fail, then capitalism has effectively failed, and the consequences are enormous.