I Do Not Think That Word Means What You Think It Means

I am sympathetic to the OWS hatred for bailouts and crony capitalism, but struggle to understand how they intend to fix the consequences of the exercise of government power in the private world with yet more exercise of government power in the private world.

Apropos of very little, I found this bit from Matt Taibi funny (emphasis added)

1. Break up the monopolies. The so-called "Too Big to Fail" financial companies – now sometimes called by the more accurate term "Systemically Dangerous Institutions" – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled

I am pretty sure that, by definition, a single industry cannot have 20 monopolies.

Though I share the same concern, my solution is to just let them fail.  Right now, the cost of capital for these large companies is lower than the cost of capital for smaller companies because, even though many of them have far worse balance sheets than smaller banks, investors feel they have too big to fail protection.  Let a few fail and have the cost of capital shoot up for larger companies and you can be pretty damn sure they market itself will break up these companies.

In some ways it reminds me of the market premium given in the 1960's to multi-industry conglomerates like ITT.  When the capital markets made their cost of capital low, everyone tried to copy their conglomerate strategies.  When these strategies started failing and companies like RJ Reynolds found their diversification into shipping and shower curtains was a business disaster, capital dried up for these Frankenstein monsters and most of them were broken up.  All without a hint of government intervention, either to save them or kill them.

Its telling that no one on the Left or with OWS who gives this advice for financial institutions takes their own advice with, say, auto companies.  GM should have failed and likely been broken up as well.

14 Comments

  1. gRegor:

    You know what's above the law and above market consequence? Government. It's the worst type of monopoly - one on the use of force.

  2. anoNY:

    "GM should have failed and likely been broken up as well."

    But but, GM provides the jobs that progressives love: manufacturing jobs! The real idiots on the left think that saving GM will save the jobs of "regular people," and forget all about the thousands of secretaries and assistants (and other non-execs) who work on Wall Street.

  3. Matt:

    Lol on the 20 monopolies. How can someone write that with a straight face?

  4. caseyboy:

    We've added a government "safety net" for individuals and the results have been counter-productive. We've also added a "safety net" for big corporations and the consequences will be disastrous for our nation.

    I understand compassion and charity when it comes to people who are down and out. But they should be given a hand up, not a hand out. Corporations should not get public assistance unless there are compelling national interests at stake and that should be a really high hurdle to get over.

  5. Daedalus Mugged:

    To be fair, through the miracle of government force, there can be 20 monopolies in an industry. Although it does not apply to financial instututions or this situation, it can be done.

    For example, many utilities still have monopoly rights within a geographic area. In banking, you could have monopoly by geographic region, by customer type, etc.

    In the private wealth management sector of banking covering the very, very rich, Goldman Sachs has a very domininant (although not monopolistic) position. In the lower ranks (serving merely 2 digit millionaires) there is a lot of competition. Among the 3+ digit millinaries, GS is very dominant.

    My two favorite descriptions of the OWS protests were something along the lines of they want a comfortable upper middle class western lifestyle, without the upper middle class work. That is a Steyn paraphrase. The other was that their solution to the corrupt government bailing out the corrupt banks was to give the government more power.

  6. Roy:

    RE 20 monopolies: Maybe the original said something different, but the posted extract does not present a problem. Each of the 20 might function in a *different* industry, having monopoly power in *that* industry. Possible. But other than what Daed Mug suggested, I think not accurate.

  7. nick caruso:

    Leftists don't see your point because they don't understand how government creates monopolies in the first place. You do a nice job of explaining that in the line:

    "Right now, the cost of capital for these large companies is lower than the cost of capital for smaller companies because, even though many of them have far worse balance sheets than smaller banks, investors feel they have too big to fail protection."

    But alas, when I've tried to make that kind of point they usually don't listen or have some long chain of vague reasoning to offer for why it's wrong or misses the point.

    See, this is why we can't have nice things. :-(

  8. Not Sure:

    "But but, GM provides the jobs that progressives love: manufacturing jobs!"

    Show of hands, progressives- how many of you are hoping, when your kids grow up, they get jobs on the assembly line in some factory?

    Oh... you meant jobs like that for *other peoples'* kids, didn't you? *Your* kids are going to be the managers in the factory, aren't they?

  9. NormD:

    While I am with you in spirit, I always wonder...

    Have you ever had an employee, say a network admin or DBA, that tries to setup systems so that they cannot be fired, say by making things so bizarre or having special passwords or whatever. They think they are protected from failing (being fired) because if you fire them, your critical systems will fail and you are out of business. It will just take too long for anyone new to figure out what was done.

    A business relies on two things to prevent/fix these problems:

    1. The employee's manager should not let situations like this develop.
    2. Outside experts can be brought in to fix things.

    I wonder if some large corporations are like that bad employee, only we have two problem:

    1. The manager that should be watching them is the government.
    2. There are no experts that can "fix" a large complex financial institution

    Worse,

    What if all the large financial institutions has entered into a complex web of bets (CDS) with their counterparts in foreign countries specifically because they know that if one fails the unraveling web of bets will bring down all the institutions and even if experts were available to fix one institution there are certainly not enough to fix dozens.

    Is this the situation? Does anyone know? If it is, what should we do? Just like the bad employee, the institution will resist attempts to unwind what they have done.

  10. Ian Random:

    Commercial non-FDIC banks go bust in an orderly fashion, why can't investment banks to the same. Too bad that loan wasn't just until they figured out how to break them up. I heard (not double checked) that the banks involved in previous problems are the ones having problems now.

  11. Smock Puppet, Piloting The Economic Seas Betwixt Scilla and Charybdis:

    >> Though I share the same concern, my solution is to just let them fail.

    I am not quite so hard-line. I would offer an alternative:

    "You say you're too big to fail? OK, suppose we grant that. Then there is a vested interest in breaking you up so you are not too big to fail any more. So we will bail you out, subject to prior submission of a plan for structural disassembly -- a breakdown, if you will -- of your company into five smaller companies within three years. We also want signed agreements from each of your corporate officers and senior VPs, that they will retire, without any existing company-related compensation, and never, ever enter the (insert industry here) business ever again. If you submit that to us, and agree to follow it, then we will bail you out... Oh, and the American public personally -- that is, each individual -- gets 'x' number of voting shares in each of the five companies in return for its investment capital. Give us a call when you have the agreements and the plan in hand. Thanks."

    See how many takers there are for that deal. Methinks many companies will decide they are not too big to fail after all, and manage to find an alternative to bailout.

    It solves the problem. And it gets rid of the deadwood Veeps, Presidents, and CEOs who ran the company into the ground in the first place, permanently.

  12. caseyboy:

    The plan is for the small banks to go bust. That has been clear from the first TARP funding. The little banks fail and then the big banks pick up the pieces for pennies on the dollar. Government thinks that is grand because when they move to take over banking they'll only have to show up at a half-dozen offices. Makes sense to consolidate them before pulling the plug and taking over.

    That is why they are wrecking healthcare and medical insurance. Once they get everything consolidated they'll take it over. You have to look past the symptoms you see to the motives and plan being implemented. ONE WORLD GOVERNMENT WHERE ALL YOUR NEEDS WILL BE TAKEN CARE OF (once government determines what you need).

  13. chuck martel:

    The unpleasant thing about the OWS phenomenon is that I don't want to be defending the banks from the protesters.

  14. Ted K:

    Taibbi probably meant oligopolies. The main point he is making is they have too much market power, too much ability to break up the system.

    For the record, DUMB-ASS, you can have more than one monopoly in one industry. It's called a regional Monopoly. If you think real damned hard about phone companies, electric companies, gas companies. Certain airline routes you only have ONE choice of company. I think even a blog host as slow-witted as you could get it after maybe 10 minutes pondering.