Capitalist Blasphemy?

Until recently, any suggestion that we should prevent corporations from becoming too big to fail was capitalist blasphemy. As the Federal Reserve considers printing money to support more government bailouts, an already old acronym [1] has been reborn: TBTF (Too Big To Fail). In all the discussion of reckless corporate decision-making and financial industry bailouts, there has been little discussion of whether any corporation should be allowed to become TBTF.

The global financial system needs retooling. There have even been calls for a Bretton Woods II [2], but with no consensus on what direction [3] it might take. Besides, as the Guardian’s Martin Kettle asked [4], “How can failed international institutions reform themselves?” Before the “urgency of action” is lost, the U.S. should nonetheless take the lead in “reining in the out-of-control financial system,” as Paul Krugman recommends [5], not simply by re-imposing financial regulations whose removal precipitated the current crisis, but by imposing new ones to prevent future corporate giants from becoming TBTF.

Citigroup is just the latest financial giant to receive a government bailout [6], and plans are afoot to provide bridge loans to the Big Three automakers. There may be sound economic and political reasons for doing both. Yet, in an economic crisis that still has no bottom and in which half a million Americans lost their jobs last month, it is time to consider regulations to prevent a future in which any corporation becomes – like some 1950s sci-fi monstrosity [7] – large enough to threaten its own creators.

Antitrust laws set the precedent. Monopolies are prohibited not simply for being anti-competitive, but for being a threat to consumers. What the financial meltdown demonstrates clearly is that corporations that have become TBTF are a threat both to taxpayers and the entire financial system. “[I]f a company is too big to fail, maybe – just maybe – it's too big, period,” Robert Reich said [8] in October:

We seem to have forgotten that the original purpose of antitrust law was also to prevent companies from becoming too powerful. Too powerful in that so many other companies depended on them, so many jobs turned on them and so many consumers or investors or depositors needed them, that the economy as a whole would be endangered if they failed. Too powerful in that they could wield inordinate political influence of a sort that might gain them extra favors from Washington.

We have faced and conquered this sort of challenge before, and in the intervening century unlearned what we must learn again:

The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being. There can be no effective control of corporations while their political activity remains. To put an end to it will be neither a short nor an easy task, but it can be done.
— Theodore Roosevelt, 1910

Corporate interests and their enablers in Washington have sold the idea that in an age of globalization, financial vitality depends on there being no checks and balances on corporate reach or sheer size. Regulation is anti-competitive, as requiring tankers to have double hulls is anti-competitive - the added cost cuts into profits. Now as our financial Exxon Valdezes sink, Americans are asked to refloat and clean up after them, leaving their Captain Hazelwoods at the helm. That serves neither corporate stockholders’ nor our citizens' best interests.

Too big to fail is too big to exist [9]. If that is blasphemy, then it is time to rewrite the economic catechism.