This recession has laid barren several notions that heretofore have gone unchallenged.
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There’s the dopey idea about real estate being a foolproof way to get rich.
There’s the concept that the stock market is a safe bet, a secure place to salt away your retirement savings.
But none of these ideas is goofier than the notion that some businesses are too big to fail.
Since the economic crisis took shape in the news, the federal government has effectively been picking winners and losers in determining which corporate players must be saved and which thrown to the wolves.
AIG got $180 billion and still counting. The feds rode to the rescue of Bank of America, JP Morgan Chase and Goldman Sachs. General Motors and Chrysler got fat checks before they headed for their ultimate destination, bankruptcy court.
Obama and Risk Assessment
Like his predecessor, President Obama has apparently accepted the premise that the federal government must play a critical role in preserving businesses and financial concerns that are so intertwined with our economic well-being that they must be saved from their own stupidity.
During a recent economic speech, the President said that in going forward, the federal government must monitor “systemic risk” to the economy. In fact, he is proposing the creation of a “Systemic Risk Council.” Their job will be to step in when, in their judgment, the recklessness of a business jeopardizes the overall health of the economy.
This ratifies the idea that some businesses are more critical to the economy than others. It allows the federal government to substitute its judgment for the brutal wisdom of the free market.
President Obama’s sentiment and anxiety are understandable. Since taking office, he has been presiding over an economy teetering on the brink.
If this policy becomes a permanent feature of the regulatory landscape, however, it will institutionalize moral hazard by detrimentally adjusting the temperament and consequences of risk in the economy.
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Businesses like Bank of America and General Motors will not only be rewarded for their mistakes, but they will be encouraged to expand their risk, knowing that the federal government will pick up the pieces in the event of their impending failure.
Although the President says he supports free markets, these initiatives bear out his fears about the consequences of “creative destruction” that free markets produce, and confirm his preference for stability over innovation.
Monopoly vs. Old-Fashioned Competition
The ultimate danger to the free market is that this policy could engender the creation of quasi-government enterprises similar to Fannie Mae or Freddie Mac in every sector of the economy.
Rather than encourage competition, this policy may usher in an era of greater consolidation and monopoly. Bigger firms will be allowed to squeeze out their smaller competitors. Newcomers will have less chance of competing against the government-backed winners.
No one wants a repeat of a financial meltdown that has consumed our economy and incinerated wealth. But this policy of protecting businesses whose decisions have put their continued viability in jeopardy is wrongheaded, and it must be opposed. Instead of propping up businesses that that have made the erroneous choices, the government must step away. Let the free market do its job.
Failure is the economy’s way of telling businesses that they have become too fat or too slow, and that their time in the sun is over. Tinkering with this basic precept is perilous, and could permanently transform the basic DNA of our economy.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
