True, half true, or just cool-sounding?

[nancylebov]

"If it's too big to fail, it's too big to exist"

And if this is true for companies, is it also true for governments?

Comments

[libertarianhawk.livejournal.com]

Sounds lovely to this libertarian . . . which is a strong sign that trying to implement it in the real world would be impossible.

[lpetrazickis.livejournal.com]

No, it's not.

Let's look at the smallest level of government -- the municipal one. Can you design a government for a city (Toronto, Chicago, Minneapolis, etc) which is not too big to fail? I can't, and to me that implies that the soundbite is false.

Humanity's grasp must always exceed its reach. Etc.

[kgbooklog.livejournal.com]

to me that implies that the soundbite is false

False in what way? "If it's too small to fail, it's too small to exist" does not contradict the original statement.

[lpetrazickis.livejournal.com]

I am saying that I can't design a municipal government for a decent-sized city which is too small to fail.

[captain-button.livejournal.com]

I think there may be some miscommunication here. I think what is meant in the first phrase is not "so big that it is impossible for it to fail" but rather "so big that we must not let it fail because the consequences would be disastrous".

"Too big to fail" is often used as the reason that the government has to bail out some corporation, because if it goes bankrupt and shuts down, it will screw up the economy massively.

I think the phrase above reflects the views of people like me who think that if a corporation is big enough to trash the national or world economy if it fails, it is too big. And that society would be much better off with many smaller corporations. Then they could be allowed to fail, letting the principles of capitalism deal with them, instead of having to bail them out to prevent disaster.

Then we could have capitalism for the rich and capitalism for the poor, rather than the current de facto system of socialism for the rich and capitalism for the poor.

Edited to fix typos.

Edit: Sorry, no ideas on applying this to governments.

[avram]

Well, one possibility is a kind of federalism: Trying to have as few national-level political structures as necessary, keeping as much as possible at the state and local levels.

[nancylebov.livejournal.com]

Exactly.

[sethg]

I think there are large institutions that are capable of doing so much good when they are working properly (or even when they are working in a mediocre fashion) that it's worth the risk that some outside party will occasionally have to rescue it from its own mismanagement.

A classical example is the irrigation network in pre-industrial China. Most of Chinese agriculture was built on marginal land, so China needed a large government and bureaucracy to maintain the irrigation system and to get sewage out of the city to fertilize the farm. When this system broke down, there was widespread famine. I suppose in a sense the irrigation system was "too big to fail", but I think it's understandable that the Chinese didn't just let famine bring their population down to a level that would keep them from depending on it.

would it matter

[(Anonymous)]

The interesting question is whether it would matter for our current meltdown. If there are ten huge banks that fail for the same reason (bad risk management, massive fraud in writing mortgages, etc.), then why couldn't there also be a hundred medium-sized banks failing? Indeed, I think when local real estate prices crash, smaller local banks get killed while big nationwide banks ride it out just fine.

--albatross

Re: would it matter

[nancylebov.livejournal.com]

I'm not sure. NPR has the occasional report on banks that are in good shape, and it looks as though one of the categories is local banks with cautious lending policies.

The problem for building theory is that my information is awfully anecdotal.

I don't know if it's less likely for 100 medium-sized banks to get caught up in the same madness.

Re: would it matter

[sethg]

Indeed, I think when local real estate prices crash, smaller local banks get killed while big nationwide banks ride it out just fine.

My impression is that the few neighborhood banks that offered mortages and held them, instead of selling them off, survived the subprime crisis pretty well, because their loan officers could use their familiarity with the neighborhood to evaluate loan applications. But now the subprime crisis has metastasized into a general financial crisis, so I think everyone's in the same leaky boat.

My accounts are at Citizens Bank, which is owned by the Royal Bank of Scotland, which hardly had any exposure to the subprime mess, but their credit rating got downgraded anyway and now they're getting some bailout capital from the British government. If even the Scotsmen can't keep your money safe....