Too big to fail: a cover for corporate welfare

November 27, 1:54 PMHabersham County Conservative ExaminerStan Transue

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The assertion that some business interests are “too big to fail” is a lie. It is based, not on economic realities, but on political pull and favor-trading. If some are considered too big to fail, then by inference, some are small enough to be sacrificed. That is the practical result of such policies. The whole charade is a cover for corporate welfare. And, as we all know, welfare demands the transfer of wealth from the capable to the inept, thereby enslaving both.

The collectivist-indoctrinated mythos of American capitalism is adorned with stories of industrial and financial giants; highlighting names like Rockefeller, Morgan, and Carnegie; all founders of colossal financial and industrial concerns. But the real success and sustainability of capitalism has always relied on the unsung heroes of small businesses and hometown banks.

There are several problems with this popular distortion; not the least of which is the assertion that some businesses are too big to fail. What “too big to fail” really means is that the concentration of wealth and power is preferable to its dispersal. But this is only true from the perspective of those who control concentrated wealth and power. Unfortunately, the “too big to fail” paradigm, when enforced by government decree, results in harmful economic consequences – mostly for those least able to endure them.

A classic example of corporate welfare is the Federal Deposit Insurance Corporation (FDIC). Membership in the FDIC requires bankers to pay a flat fee. The fee is in no way conditional on their liquidity, profits, losses or the soundness of their lending policies. Prudent lenders pay the same as wildcat speculators. Since the cost of protection is the same, bankers are encouraged to take greater risk to capture a larger market share. The result is that conscientious lenders are squeezed out and reckless investors are rewarded.

This same result occurs in other ventures under “too big to fail” policies. Executives of corporations that are too big to fail are free to take greater risks than they might if they faced the reality of bankruptcy. When the market is bullish, they reap huge profits. When their businesses falter and they lose money, their losses are shifted to the taxpayers through government bailouts. It’s a win-win scenario for Wall Street and a lose-lose scenario for Main Street.

As if the economic consequences of corporate welfare weren’t enough, when coupled with the Federal Reserve-manufactured boom and bust cycles, inflation, regulation and minimum wage laws, mighty corporations gain an even more lopsided advantage over the small. In every artificially created economic cycle, those with the least resources and political clout are more likely to fail; only to be scooped up at bargain prices by the giants.

In a Laizzes Faire economy, some industries may grow large, but without government intervention their mammoth size can be as big a dilemma as it is an advantage. But when they manipulate the political process in addition to controlling vast quantities of capital, their advantages are magnified and their vulnerabilities mitigated.

Meanwhile, the prudent small business owner, who limits debt, controls costs and provides value to local customers can weather meager times just as well as the big guys – if the playing field is level – meaning that market forces are allowed to determine outcomes naturally. In fact, the prudent small business owners of the nation are just as capable of buying up the assets of failed giants as are large concerns.

Not only does the “too big to fail” paradigm provide unequal advantage to big business, but when bailouts become “necessary,” it can be employed unevenly among the big fish as well; allowing some to survive while others are left to fail. An example of this was demonstrated when former Treasury Secretary Hank Paulson approved Troubled Asset Relief Program (TARP) funds for AIG; Goldman Sachs biggest debtor; but not Lehman Brothers or Bear Stearns; Goldman’s two major competitors.

According to a New York Times article, Hank Paulson, a former CEO of Goldman Sachs, approved over $85 billion in TARP funds to rescue the troubled insurance giant AIG. AIG’s outstanding debts to Goldman Sachs meant that $13 billion of the money given to AIG went directly to Goldman Sachs.

According to the Times, “...since the $700-billion TARP bailout, Goldman Sachs has been doing very well for itself. Since several of its competitors disappeared from the market, the Wall Street investment bank has cornered the program trading market; by some accounts, half of all the automatic, computer-based trades done on the New York Stock Exchange are now carried out by Goldman Sachs.”

While the Goldman Sachs scenario is an example of big fish being devoured by bigger fish; smaller businesses and struggling home owners (the ones TARP funds were supposed to help) continued to flounder without relief.

The Obama administration has engaging in the same kind of “too big to fail” scams with equal fervor; based on the same motives and with the same results. The defacto nationalization of General Motors was aimed at protecting United Auto Workers (UAW) – a union too big to fail. Obama even delivered a quid pro quo for union campaign contributions by awarding the UAW part ownership of GM.

In the end, businesses “too big to fail” have only one unequal advantage against small businesses. They have the resources to buy congressmen in one election cycle after another, and cultivate powerful government connections through the private sector-public sector revolving door (an unethical practice that both parties employ), thereby insuring their already great wealth is coupled to the power of legislation that favors them over everyone else.

The solution to this dilemma is not to add another layer of regulation or oversight, but to strip the government of its power to intervene in the private sector entirely. Without that power, big businesses would be left with the same advantages as everyone else – ability, capital resources, intelligence and wisdom.