Too Big To Fail Is To Big.

I’ll say it again: Too big to fail is too big period. More consolidation is not the answer. Bigger is not always better, people. I do hope that after we get done bailing out all of these giant, supposedly rock solid, companies we can see some reform in how we look at mergers and acquisitions in the future.

Put Paulson on Pause

So this morning I learn, courtesy of Today’s Papers, that:

…the Treasury Department officially announced that it has switched gears and will no longer be using the $700 billion bailout package to buy toxic securities. Instead, the money will continue to be used to inject capital into financial institutions with a stepped-up emphasis on efforts to loosen up the frozen consumer credit market.

This was not exactly a suprise, and some might argue it wasn’t even news.

I’m not opposed to the government freeing up lending for cars and student loans, but for credit cards??!?! You have to be kidding! As someone who’s paid his share of credit card interest and fees, I find it astonishing that anyone could pity these companies or have concern about their ability to stay in business. Giving bail-out money to credit card companies is like giving government-subsidized pornography to rapists recently imprisoned rapists.

Obama will be in the white house soon and that will mean change, and hopefully good change. Since the Treasury Department isn’t sure what to do with the Troubled Asset Relieve Program, here’s an idea: We have a huge amount of infrastructure that was built during the last depression, and in many cases hasn’t seen enough maintenance or has been outgrown or both. These are assets. They are in trouble. If you invest in them, they will stay here. The employment created will stay here. They won’t use the money to throw lavish parties or pad offshore accounts or just sit on it to build confidence. It will employ people, and while some projects may take a while to plan and get going, AASHTO has identified ~$18 billion worth of projects that can be started in 90 days or less.

While I’m sure China would love to see healthier credit card companies because much of what people buy with credit cards is made in China, let’s rebuild our country instead.

What if we actually did let GM fail?

I recently picked up the book “Economics in one lesson” by Hazlitt. It had 5 stars on Amazon, and was hailed as all the econ education anyone really needed. As I read the book, I recognize economic theory, but I’m a bit appalled at how educated folks can assume that theory is reality.

For example, the one of the first items in the book is the idea that government spending doesn’t create jobs. The theory is that economics is a zero sum game, and if we tax and then spend the money to create jobs over here, then the money that would have been spent without the tax over there isn’t spent and doesn’t create jobs. The jobs here must of course equal the jobs there because the money is equal.

Never mind that outsourcing exists. Never mind that not everyone has the same skills. Never mind that spending on the part of the government doesn’t mean immediate taxation (as Bush and the deficit have proven) and never mind that nothing in the economy happens instantaneously.

Another item in the book is that automation doesn’t reduce employment, but actually increases it because it reduces the cost of goods which indirectly increases the standard of living and therefore spending and therefore creates more jobs. I’m sure all the farm labor that was displaced by farm automation eventually did find new work, but it surely took a while, no? Again, nothing happens instantaneously, and let’s not forget that business owners presented with lower costs don’t always reduce prices and pass the savings on to the customer.

The last item I wanted to mention (I am going somewhere with all this, I promise) is that we needn’t worry about discharging returning soldiers – their increased demand will produce the jobs that will employe them. Again, the theory makes sense, but the timing is fubar. This assumes each solier comes home with enough money in his pocket to spend long enough to create enough demand to provide a job for himself. I know my wallet isn’t big enough to hold that much cash.

In each of these cases the job of government is to provide the cusioning for the theory to work. To spend money on, say, infrastructure to create jobs that can’t be outsourced as a temporary boost. To retrain folks who are displaced by new technology to speed the process of new job creation. To give the soldiers enough cover to get reintegrated into society.

I’m not opposed to helping GM. I’m not sure it’s really necessary, but I’m also not willing to experiment with something so large. I say save them, but then break them up so they’re not so large they need saving in the future. Same with the banks. Too large to fail is too large period, and just like gasoline is not the answer to fire, consolidation is not the answer to “too large to fail.”

But I wondered what Hazlitt would say about it. He’d no doubt say that was no help was necessary.

He’d say that when a business goes under it dumps a bunch of talent on the market, and like returning soldiers that talent will create the demand for the jobs it needs. This new talent will reduce the overall cost of talent becase companies can now replace their existing employees with cheaper talent that’s been recently released from the failed company, and will be willing to work for less.These savings, just like the savings automation brings, will allow companies to employ more people, or will be passed on to the customer who will drive up demand and employement elsewhere. Surely an effective argument could be made that not only should GM not be helped, but they should be left alone and shown no mercy.

All kidding aside, I believe we need to do the following:

1. Begin infrastructure spending to repair and improve existing infrastructure. This reduces the time required to get things moving, and ensures we spend only on things we’re going to use.

2. Help those who are “Too large to fail”, but immdeiately afterward, break them up. Too large to fail is too large period.

3. Flay any bank that uses TARP funds to make aquisitions. Flay them alive. We don’t need larger banks, and any business healthy enough to buy something doesn’t need TARP funding.

4. Provide tax relief for those who tapped into their 401k’s to stay afloat during these tough times. I’d rather do this than bail out people to defaulted on mortgages they had no business taking (or being offered) in the first place. It would be nice to reward those who tried to survive rather than just wait for a handout.

5. Last but not least, we need to find out if anyone was culpable and make them responsible. One thing I’ve read over and over, and seems to be supported by the behavior of banks receiving TARP, is that ethics in business has degraded to unacceptable levels. This needs to be changed. Without solid ethical boundaries, we’ll only face some new disaster or calamity when unscrupulous business people recover from this one.