"Too big to fail"

It is interesting that you bring this topic up today because a group of some of the top economists in the United States have released a new message to Congress to let the big banks fail: http://money.cnn.com/2009/04/21/news/too.big.fortune/index.htm?postversion=2009042112

I would really like to see what all of you who have been chanting "too big to fail" think of this. Particularly you Parakeet (not trying to call you out, I just want to know what you think . Also, there is mention of how propping them up could lead to a situation like that in Japan, which we were debating about in another thread earlier.)

Well. They definitely were too big to fail in one sense of the word. We couldn't let them fail without dragging half of our system down with them.

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MYP. I read the article and wasn't impressed. It was a particularly weak argument (I personally know of better ones for that side).

The first two mainly argued that we could end up in debt if we kept supporting the banks. That's not a real danger. Obama already worked up the numbers for a decent surplus next year that should even carry over if things don't get much better.

We also have about another 3.5 trillion to borrow before we hit the danger mark. So, as long as Obama and the government is aware of it, there isn't any danger.

I have no idea what they are talking about with The Lost Decade. If I remember correctly, the Japanese crisis was caused by deflation that killed consumer spending and made things stagnate. I really have no idea how our current policy could do anything close to that.

*Edit - I dug around for a minute and I guess I see the argument. It's wrong though. These aren't zombie banks that we are supporting to keep them alive. AIG is the only thing that's close to it. The main banks are returning to profitable margins now that credit has started to flow. We didn't keep AIG alive for the sake of it, we did it because it was more efficient to keep it alive than to let it fail and bailout the few dozen other banks it would take with it. Even letting them fail would have a high cost due to the FDIC. The ones that were zombies failed or got bought out. A big aspect of the lost decade was the frozen credit market, which we've already started to thaw.

The third guy has an idealogical point. They should be held responsible. I don't know of anyone who doesn't really agree with that. Only the fool blindly follows an ideal though. If we let them all fail, the credit crunch would have hit mainstream businesses and it would have been catastrophic. We had to unfreeze the market before we could do anything to make it better.

Realistically, the market should be ready to take back control once we finally get the toxic assets off the books. I've heard that what we're doing is pretty similar to the S&L crisis solution, which worked out fine in the end.

For the first time in my almost 60 years I have wondered, are we ""Too big to fail" as a nation? Not trying to be dramatic. But we have so many players on our team so determined to do things their way. What chances are they willing to take just to prove their point. It reminds me of poker players high on the game screaming "all in".

Maybe I am wrong. I hope I am.

I think there's nothing that's "Too big to fail". Most of the big companies fall into bankruptcy especially pre-need companies. It's always big things fall first then smaller things come after them.

GekiDan said:

I think there's nothing that's "Too big to fail". Most of the big companies fall into bankruptcy especially pre-need companies. It's always big things fall first then smaller things come after them.

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Except when they are BIG Investment Banks. Then they get bailed out!

deanhills said:

Except when they are BIG Investment Banks. Then they get bailed out!

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Sorry to tell but I can't really understand this "bail out" thing.
Can someone explain it further?

I'm not going to get into whether it's right or not to LET the companies fail... but it's most definitely not true that they are too big to fail. Just look at Enron. Aside from that, what is the point of just keeping big companies alive if they aren't profitable... you might as well just let it fail and give the workers the money directly... it's basically the same thing.

I think a company that is 'too big to fail' is one that has so much money or so many employees or is so tied in to the economic system that letting it suddenly go under could cause a string of other economic failures that would seriously harm the county or the economic system.

There is a psychological effect, too. Lehman Brothers was generally considered to be too big to fail. When the government decided it wasn't, it through the market into a frenzy. What if a lot of other companies in that category were going to be allowed to go under?

curious said:

I think a company that is 'too big to fail' is one that has so much money or so many employees or is so tied in to the economic system that letting it suddenly go under could cause a string of other economic failures that would seriously harm the county or the economic system.

There is a psychological effect, too. Lehman Brothers was generally considered to be too big to fail. When the government decided it wasn't, it through the market into a frenzy. What if a lot of other companies in that category were going to be allowed to go under?

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Maybe that's what we need... a complete restructuring. Sure, people are going to be in trouble for a while, but in the long run, I think it would be for the better than to dump money into companies that are no longer doing what companies are suppose to do - make profit otherwise it's basically charity, in which case you might as well just give directly to the people and let new and innovative companies pave the way - companies that deserve to survive.

The psychological implications are a good thing - perhaps it will make people realize that you have to keep things together. Just because you work hard to get big, doesn't mean you should be able to slack off, make mistakes, and have someone else carry you for it.

curious said:

I think a company that is 'too big to fail' is one that has so much money or so many employees or is so tied in to the economic system that letting it suddenly go under could cause a string of other economic failures that would seriously harm the county or the economic system.

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Perhaps this is a very good indication that one should not have companies that are "too big to fail". Apart from the fact that they can hide a million of sins as well, are too big to communicate with the little man openly and fairly and transparently. Perhaps these big investment banks should be forced to branch off certain of their businesses so that they can be much easier to access and be more open in their activities.

Delta said:

Maybe that's what we need... a complete restructuring.

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I think that is what the government wants to do. But we'll have to work it out carefully, and some things are bound to not work as expected and have to be changed. But it is pretty clear that letting companies have free reign doesn't work.

curious said:

I think that is what the government wants to do. But we'll have to work it out carefully, and some things are bound to not work as expected and have to be changed. But it is pretty clear that letting companies have free reign doesn't work.

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I am very cynical about this. The only way they could become small again was to have allowed the big ones to fail when they should have. Government in cahoots with those large companies allowed it to survive anyway.

The natural cycle was for them to grow. Growth made them powerful. The bigger you are in the financial world, the more hedges you can have against short-term losses. The ones who got nailed by this weren't the standard savings banks. It was primarily investment banks.

If we had let them all fail, we would have had economic chaos for a few years and then a rise in power for a few banking groups. They the establishment of new fund and another big buildup. It just tends to happen.

The Parakeet said:

The natural cycle was for them to grow. Growth made them powerful. The bigger you are in the financial world, the more hedges you can have against short-term losses. The ones who got nailed by this weren't the standard savings banks. It was primarily investment banks.

If we had let them all fail, we would have had economic chaos for a few years and then a rise in power for a few banking groups. They the establishment of new fund and another big buildup. It just tends to happen.

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I thought that those guys who lost their properties through mortgages that they could not afford were served by the big banks? Banks were handing out mortgages left right and centre. And that the 1.2-trillion also earmarked those who were in dire straights along these lines? I am almost certain that a reason for this is the lack of the personal relationships that Banks used to have with their customers a long time ago along the lines of "know your client". Banks have become too big to serve the people in the street effectively, and have grown into serving profit centres. Their promises of service to their clients have become so very artificial and a great waste in terms of all those glossy leaflets everywhere and faceless call centres.

I personally have no desire to have a bank that knows me. I am with a brokerage firm and have one of those combo accounts with checking attached. I did have a broker but since my money is gone, I've been transferred to a different account with a sort of call center arrangement. It hasn't made any difference at all. I do everything online, and if I didn't have this account already, I probably would be at one of the online banks that doesn't have any brick or mortar at all.

I think the problem is greed and the lack of regulation. Quite simply, there should be some sort of minimum standard for all loans. You should have to have a down payment. You should be qualified on an adjustable for an interest rate that is at least one point higher than the one you will be paying initially. Certainly negative equity loans should be illegal.

curious said:

I personally have no desire to have a bank that knows me. I am with a brokerage firm and have one of those combo accounts with checking attached. I did have a broker but since my money is gone, I've been transferred to a different account with a sort of call center arrangement. It hasn't made any difference at all. I do everything online, and if I didn't have this account already, I probably would be at one of the online banks that doesn't have any brick or mortar at all.

I think the problem is greed and the lack of regulation. Quite simply, there should be some sort of minimum standard for all loans. You should have to have a down payment. You should be qualified on an adjustable for an interest rate that is at least one point higher than the one you will be paying initially. Certainly negative equity loans should be illegal.

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I prefer to deal with human faces together with the ability to do automatic deposits and withdrawals. Sort of a mixture of the two.

deanhills said:

I prefer to deal with human faces together with the ability to do automatic deposits and withdrawals. Sort of a mixture of the two.

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I agree to you. Plus how will these companies pay their taxes if they don't have sufficient income? I think they should just close down and give their seperation pay to their workers.

How about Microsoft Corporation? Do you think they will fail?

GekiDan said:

How about Microsoft Corporation? Do you think they will fail?

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If they did it would put a lot of unemployed "hackers" out there needing money. Some of them might get into some mischief.

Microsoft could actually fail pretty easily, if I remember some old tech analysis correctly. A ridiculous portion of their income is in the form of Microsoft Office (something like $14 billion a year). Open Office is growing in popularity and offers a free alternative that's just as good, if not better.

Google currently owns Open Office. If they decided to use their ridiculous web presence to advertise it and make it really mainstream...then Microsoft could lose a huge chunk of easy profit.

It would require Google to be so mad at Microsoft that they'd take them down just out of spite though.