Too Big to Fail and Too Connected to Care

This week’s headlines include a rising unemployment rate, a slowdown in factory orders, and the slow disintegration of the Euro.

As the recession enters its sixth year every trick has been tried as the economy skitters off a cliff.

We have tried stimulus and austerity; we have tinkered with tax incentives and quantitative easing 1, 2 and soon-to-be-announced QE3. We have reduced payroll taxes and lowered mortgage rates to historic lows – and yet the economy refuses to soar, lying there like the soft deflated balloon it has become.

Policy-makers, politicians, and economists bicker about what type of extreme action is necessary to raise our flagging fortunes.

This is not the first time that the economy has had a crisis. Modern capitalism has suffered panics, bubbles and crashes repeatedly and often. Part of its genius is that it will brutally reallocate resources from less productive endeavors, cure oversupplies, and staunch irrational exuberance, when allowed.

That is the problem. The government and the politicians have developed a policy that, once adopted, has drained our economy of its dynamism, and perverted it to a system akin to an old Soviet style 10-year plan.

Every policy and plan developed over the past six years has been developed to stop the economy from crashing once its foundation has been removed. The government calls it “too big to fail.”

“Too big to fail” is nothing short of the government indirectly seizing control over the economy. The companies it helps with our tax dollars are free to spend our money as they see fit, with no concern for risk or profitability. If they win, the stockholders make money; if they lose, we get the bill. It’s a bigger version of the old “Heads they win; tails we lose.”

Worse than that, the government now gets to pick the winners and losers. Goldman Saks gets a $10 billion loan; Lehman Brothers, who didn’t kiss the ring of the powers-that-be, gets the boot. Bank of America gets the President of The United States of America trotting out Warren Buffet to extoll the virtues of its stock, while WAMU is given to JP Morgan Chase in a sweetheart deal with the government.

The economic malaise will continue until failing banks are closed instead of being bailed out, until stockholders are forced to bear the loss of poor risk management, and until the government’s power to pick winners and losers is rescinded.

As a side note, don’t believe the panic mongers who will tell you it can’t be done. In fact, it was done in the last banking crisis; the resolution trust was created, failing banks were seized, assets were sold to healthy banks, and no performing loans were worked out – just as it’s always been.

“Too big to fail” means too insolvent to prosper and too connected to care.

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