Enough of "Too Big to Fail"

One result of the financial industry crisis is a startling awareness of just how vulnerable the American economy and citizenry are to the policies and performances of megacorporations. Cases such as AIG and Citigroup make plain that the private decisions of such large and crucially positioned companies can have very public ramifications. They are are deemed "too big to fail." With this realization has come the dawning comprehension that their profits may be private but their liabilities, when they become serious enough, fall to the public charge. That is because of the fear that their failure would drag the rest of the national economy down into Depression with them, a fear that may well be true.

What do you do when the public of a democracy is at the mercy of people who are not accountable to the public? For starters, companies that have received federal "bailouts" should be under some rather strict federal requirements as a condition for getting the funds. It seems the Bush Administration utterly failed in this regard. Thus far as the case of AIG seems to indicate, the Obama Administration is not off to a very good start either. Perhaps the "stress tests" financial institutions are undergoing may yield some benefits, but up to now the government has acted as though it is afraid of the big banks.

That has to stop. Those who seek money are the ones with hat in hand. Contrast the harsh terms imposed on the automakers, with blue-collar workers having to grant concessions in exchange for their bosses getting money, with the lack of requirements made of banks as they continue with lavish bonuses and a reluctance to evidence transparency. Obama's rhetoric on this has been excellent. But up to now the oversight of his minions appears to be sorely disappointing.

A second point is that once the government (the taxpayers, the people) has contributed enough to have a majority stake in an entity, they should own it with all the rights that implies. AIG, for instance, has gotten enough help to be 80% government-owned. Companies like that should be in receivership like bankrupted citizens or failed banks taken over by the FDIC. There could be terms for them to repay the assistance or buy back their shares and return to private status, but only after they have met their obligations to the people who have acquired them first. And that is us.

Third, we need to consider not allowing anyone to get "too big to fail" any more. There was a time when antitrust was enforced, but that seemingly was a long time ago. America's Community Banks see the inequity and are complaining about it. C. R. Clouthier, President of Midsouth Bank in Louisiana, told the House antitrust subcommittee Tuesday, "Excessive concentration has led to systemic risk and the banking crisis we now face." Speaking for the Independent Community Bankers of America, Clouthier said his fellow small bankers felt it is patently unfair that big banks get bailed out while community banks are summarily shut down. "Community banks are angry," he said. See an article on this here.

The solution, he offered, was for Congress to "identify banks or other financial institutions that have become so large that their failure poses a systemic risk and put them under federal supervision." These might be placed under the Federal Reserve. The idea calls to mind the old Public Utilities Commission, which used to regulate "Ma Bell," the one national phone company, for decades.

The idea no doubt has merit if the alternative is to simply leave the economy once again at the mercy of the greedy and shortsighted grubbers on Wall Street. Of course, another approach might also be to prevent anyone from getting that big, as antitrust was wont to do in the days of someone like Teddy Roosevelt vis a vis Standard Oil. But perhaps that is hoping for too much of a good thing.