Too Big to Fail For A Reason

Now that we’re one year deep in a recession and with things getting worse, it’s useful to think about is just exactly how we got here in the first place. One of those problems is, in my opinion, the “too big to fail” problem. Our economy has become so grossly interconnected that the collapse of even one or two big companies can lead to the collapse of many many others. How did this happen?

For one thing, there are simply way too many ultra-large companies. A creation, in part, of state and federal regulations that reward and encourage mergers, consolidations, and large companies combined with regulations that, quite frankly, discourage the creation of self-employed businesses, smaller companies, and the like. Not to mention subsidies that are much easier to take advantage of if you’re a bigger company.

To be sure, there are economy of scale issues that would, in a freer market, also allow for the creation of large companies (like the poor, we’ll probably have big box stores with us always, too). But government policy has skewed our economy in the “big business” direction much harder than what would have naturally evolved.

I say this because, let’s face it, in an information age where the costs of custom manufacturing continue to decline, small businesses with niche markets should be a no-brainer. Indeed, such businesses are on the upswing–but not like they could be. They have a difficult time competing because land use regulations, a maze of tax and business regulations, the 2005 bankruptcy act and our current nightmare health insurance market all truly inhibit risk-taking and the growth of new business. We are becoming a “service economy” in large part because government policy is encouraging that evolution–to our detriment. As Peter Schiff has said on more than one occasion, we can’t build a sustainable economy that isn’t based around “making stuff.”

If we’re going to truly grow an economy for the 21st century, we need to start with streamlining regulations and processes so that it’s much, much easier to operate a self-employed business and a smaller company. I’m sure it would take a book to describe how to get there, and the nuances could be endlessly debated, but this should be the goal.

FILED UNDER: Economics and Business, US Politics, ,
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. raoul says:

    And here I thought there was so much regulation that Madoff was not able to get away with his Ponzi scheme or investment bankers could not sell non-assessed assets or that U.S Government mandated oil prices to shoot up to $147.00 a barrel. Yup- it all makes sense now. The government orchestrated the ruination of the economy by its ongoing intervention and free enterprise had nothing to do with it.

  2. Steve Plunk says:

    I agree with Alex here. Government regulations favor the big boys over the mom and pop operations from coast to coast. I find it funny those opposed to Walmart coming in are also the biggest proponents of heavy land use regulation and government control. Of course they run to government to stop Walmart when they do come.

    The latest trend here in Oregon is the assessment of system development charges or SDCs on new homes and businesses. Now of course Walmart can afford the hundreds of thousands of dollars they are forced to pay but can a small start up afford the tens of thousands of dollars? Not likely. Even small expansions of existing businesses are levied these fees. The result is predictable though lamented. Small businesses are at risk.

    While it may take a book to describe how to fix this any small steps in the right direction should begin immediately.

  3. Too big to fail from who’s perspective? Who cares if I think someone is too big to fail? The problem comes when those who can set and control rents begin to believe something is too big to fail, or at least when it becomes convenient for them to use it as yet another opportunity for graft.

  4. charles johnson says:

    Insufficient trustbusting. Something too big to fail? Break it into pieces.

  5. Steve Verdon says:

    Streamlining regulations and red tape isn’t going to happen anytime soon.

    In fact, given the groundwork laid by FDR, Bush has expanded the number of regulations impacting the economy quite substantially. I don’t doubt that Obama will continue this trend.

  6. Drew says:

    Alex –

    I’m a private equity guy who invests primarily in $50- $200MM revenue companies. That’s small business. So I think I have a stake in this commentary, and a legitimate point of view.

    You tell us big corporate favoritism on the part of govt is a problem. Agreed. You cite regulatory problems etc……agreed. But those regulatory things trickle down from bigco directed regulatory initiatives. And the vast majority are Dem driven.

    Now, you have described yourself previously as libertarian………but you repeatedly defend Obama. Do you really think Obama is going to be friendly to small business? Is there anything in Obama’s tax/regulatory DNA that suggests that small business will be benefitted by Obama? Many pols have promised it. No Dems have delivered. Higher cap gains taxes? How will that help? Higher carried interest taxes? How does that help? Myriad regulatory compliance issues that IBM can afford, but hurt the $70MM XYZ Widget Company, how does that help? Public union ratification voting? How does that help?

    If, 5 years from now, I am wrong, you have a standing invitation to come up to Chicago and join me at Mortons, and I’ll buy the Chateau Petrus. But I just don’t think I will have to deliver on that.

    Although I’d love to.

  7. I’m a private equity guy who invests primarily in $50- $200MM revenue companies. That’s small business.

    Hmm…, guess I have a nanobusiness then. Happy to join you at Morton’s for the Petrus though — nudge, nudge… or we can do at Morton’s in St. Louis.

  8. tom p says:

    Government regulations favor the big boys over the mom and pop operations from coast to coast.

    Any body who has ever lived in a small town can attest to this. I live in a small town (>2000) the slightly larger small town up the road (5000+) gave Wal-mart the tax breaks they wanted, my small town has been struggling ever since (keeping their heads barely above water) I refuse to go to Wal-mart. They get the tax breaks… the M & P stores who have been here for a 75+ yrs? They get f*cked.

  9. Drew says:

    Charles –
    Certainly no “dis” implied. I once ran a $2MM rev business.

    Whether $100K, or $10MM, or $100MM in rev, wouldn’t it change perspectives if commentators here actually had their own capital at risk, and had to meet the payroll, and deal with the issues of business owners before pontificating about how to tax and spend and all the rest.

    Everyone is bold, and an expert, when its other peoples money at risk…………

  10. Drew says:

    Oh, and Charles –

    We might be able to arrange that Bordeaux-fest…….

    I’m picking up my back-buy of about 7 cases of 2000 this week, including reasonably priced Vieux Chateau Certan. The only “reasonably” priced Pomerol I’ve ever come by.

    And then, I’m getting giddy, my futures purchases of 2005 are in. Some fine drinking……..alas, 10+ years from now. The traditional assorted L&R bank reds aside, this includes a case of Suduiraut……..

    I’m crying now…

  11. Don’t tease me bro!

    My Bordeaux experiences are somewhat more humble though I used to be fond of Lynch-Bages and the occasional Lafite Rothschild. Dabbled with Sauternes, but couldn’t find many other friends that liked to indulge in them with me. Switched about fifteen years ago to California Cabernets and Zinfandels. And Vintage Port. Lots of Vintage Port. Some outstanding releases coincided with my time in England. But that’s a tale for another day.

  12. Drew says:

    Sir Charles –

    I hope they don’t delete these posts, as they are clearly off topic……however…….

    I don’t know squat about port, but yes, it does appear to be a British thing. I just like to finish the evening with a Sauterne and cheese, or a single malt and cheese.

    My problem with ‘Caly-forn-ya’ reds right now is that pop culture wants fruit bomb wines. That’s fine, but….

    I’m a traditionalist. I think those wines are crude. Hence, Bordeaux. That said, St Emillion is producing “fruit bombs” in “garage” vinyards right now, especially given the blockbuster 2005 vintage. Worth investigating.

    More later……….but long live Bordeaux. Can I give the blogosphere an undiscovered and inexpensive, but quality, wine they must buy: 2005 Reignac.

    Find it and buy.

  13. Drew, look forward to pursuing these discussions with you in another forum at another time.

  14. tom p says:

    OK, let me get this straight… How did we get from:

    Now that we’re one year deep in a recession and with things getting worse, it’s useful to think about is just exactly how we got here in the first place.

    to:

    I don’t know squat about port, but yes, it does appear to be a British thing. I just like to finish the evening with a Sauterne and cheese, or a single malt and cheese.
    My problem with ‘Caly-forn-ya’ reds right now is that pop culture wants fruit bomb wines. That’s fine, but….
    I’m a traditionalist. I think those wines are crude. Hence, Bordeaux. That said, St Emillion is producing “fruit bombs” in “garage” vinyards right now, especially given the blockbuster 2005 vintage. Worth investigating.

    Now on one level I get where you are coming from (I love single malt, but I have not been able to pay for one in a year)(not because I couldn’t, but because I knew I would pay for it later)

    But really, I am just trying to figure out how to survive these next few years, and you all are speaking of the best vintage wine?

    To quote Warren Buffett: “It is class warfare, and we’re winning.”

  15. Drew says:

    tom p –

    Look. I hope things work out for you, I really, really do. But comments like this on political sites, or in general discourse, boggle my mind, and remind me of the line in the Godfather, where “Johnny Fontaine” whines ‘what can I do, what can I do’ and Marlon Brando slaps him upside the head and says: “you can act like a Man, that’s what you can do!!!”

    We have become a nation of whiners.

    I thought I was hot shixt when I graduated from college. Engineering degree. Employed in an industry that Wall Street said was going to be hot in the mid-80’s. Easy street, right?

    Then the shixt hit the fan. And I had a problem.

    That’s when I realized I had to take my career direction into my own hands, or forever be tossed and turned by external events beyond my control.

    It’s a long story, but with a stint at the best B-School in the country, and other various career stops, I don’t have to worry about money or career anymore.

    But I know what it took: the endless weekends spent in the library. The evenings in class. Basically investing my last saved dollar to pay my way through school+. Taking risk. Faith in self. Blah, blah, blah…

    But my story is not special; its no different than many, many others who get ahead. In fact, I probably faced a lesser burden than many.

    But there is a common theme: you have to go do it. Not talk about it. Not wait for a politician to deliver it. Go do it. Its worth it. You gain control of your future.

    But so many people today in our society seem to feel entitled, or dependant on government. Government is to pave the way, they say. Things should be easy. For these folks, roadblocks that others view as simple obstacles along the way are “horrific crises.” Crises that government is to come in and fix. I’ve got news. Waiting for these fix’s, people, is like Waiting for Godot.

    And you remember how that play worked out…..right?

    There’s a guy on this board (Verdon) who consistently points out the follies of government policy, and the error of government reliance. Please heed his words.

    Tom – you’ll enjoy your single malt or your Sauternes. But you need to go get it – yourself. Barry-O has a nice, flowery voice, but the truth is he’s not going to deliver jack squat for you……..including that Talisker, which I highly recommend.

  16. tom p, so do you insist no one should have anything unless everyone can have it?

    Mmm… Talisker. And Lagavulin. And 18 year-old Macallan.