Monday, March 2, 2009

Anti-trust policy and systemic risk

Some food for thought...

If a corporation is deemed "too big to fail", that necessarily implies a government and taxpayer guarantee against failure.

Should we start considering such entities as targets to be forcibly broken up?

The alternative, a government bail-out, implies that government will rescue "too big to fail" companies — but only during the bad times. During good times, corporate managers will run the company. This leads to incredibly unbalanced incentives:

A "too big to fail" company is managed by executives who need not worry about what happens when the company fails.

Compounding the problem, political appointees and elected officials inevitably inject their own agendas into the mix during the rescue, complicating and possibly prolonging the pain (politicians are not known for their business acumen).

This happened with Freddie Mac and Fannie Mae, due to their wink-and-nod government guarantee. These incentives can arise with any company anoited publicly as posing systemic risk to the financial system.

1 comment:

AllenB said...

I think you've got the right idea here. As soon as a company becomes "too big to fail", it might as well be another entitlement program for all the chance we have to avoid paying for it.