Too Big to Fail

Over the last few months we've been hearing this phrase quite a lot in the news media. Essentially, it is proposed that recent multi-billion dollar bailouts of various financial institutions by the United States government were necessary because these institutions were so large, and consequently so integral to our economy, that their failure would have been disastrous. I am not an economist, and have no reason to doubt the truth of this claim. In my opinion, however, if one is to accept the 'too big to fail' justification for the recent bailouts, there are certain other actions which are required by the same reasoning.

Presumably, the disastrous consequences which would result from the failure of the too big to fail companies would cause serious financial hardships for all, or virtually all, Americans, not just for those with some direct financial interest in the companies. This is the premise of another claim that we've been hearing a lot of: the current financial crises encompasses both wall street and main street. Thus, using taxpayer money to bailout enormous corporations is not an outrageous upwards redistribution of wealth, but actually a necessary step to protect all citizens from financial disaster. I find this eminently reasonable, as protecting vast numbers of ordinary people from financial ruin is certainly a laudable goal. Yesterday, Hank Paulson declared his recent bailout a success, because the credit markets are apparently improving somewhat. (see Hank Paulson Declares Victory at Salon). Presumably, this will ultimately provide relief to ordinary people.

The problem with the 'too big to fail' justification for these bailouts is that in American politics, saving ordinary people from financial ruin is not typically considered a high enough priority to justify interfering with the free market, or requiring those who are doing well financially to pay to support those who are struggling. Quite frequently, it is argued that this is ultimately in everyone's best interest, as interfering with the free market or providing people with financial safety nets takes away their motivation to work harder, and contribute more to the economy. To reconcile support for bailing out companies that are 'too big to fail' with opposition to providing struggling Americans with direct aid, it is often implied that these bailouts must be an isolated exception to a general rule, where the cost-benefit analysis so strongly, and unusually, favored the bailouts, that everyone would understand they were an aberration, and not view them as setting a precedent.

Considering the vast sums allocated for this bailout, however, the potential impact if it were used in other ways appear similarly justifiable. For example, there are approximately 35 million Americans living below the poverty line. If the 800 billion dollars were divided amongst them evenly, they could each be given nearly 23,000 dollars. That's at least twice the yearly income of any individual living below the poverty line. It seems self-evident that this amount of money could lift many, if not most, of these people out of poverty. It is enough money to buy a car, or perhaps to pay for living expenses or child care while a person goes back to school. Have the benefits of the recent corporate bailouts significantly outweighed saving tens of millions of Americans from poverty?

Objections to such an expenditure as socialistic or redistributive do not seem reconcilable with support for the recent bailouts. Ultimately, what I find most disturbing about these bailouts, and the 'too big to fail' concept, is the idea that the unacceptability of failure is something that kicks in once a corporation reaches a certain size. Why is it unacceptable to allow a company to fail when doing so would plunge many people into financial ruin, but acceptable to allow individuals to suffer the same fate for other reasons, unrelated to their own conduct. Why should those who would have suffered if AIG or Bear Sterns were allowed to die be bailed out, while those who are suffering because of the subprime mortgage crisis, or who were fired because their employer moved overseas be left to fend for themselves? It may be true that, from a national perspective, these companies were 'too big to fail', but for a family struggling to stay in their home, keeping up with their mortgage or rent payments is an undertaking that is similarly too big to fail, and if the former is true, it is only because of the latter.