I don’t think so.

Rehberg is being very short-sighted if he believes his constituents benefit living in a country that tells the world’s investment community, “we take over industries here whenever we feel it in our best interest.”

Randy: Super: “How do you propose to know when it’s proper to clip a rising company, before it gets “too big to fail?”I haven’t the faintest idea. But I sure hope someone will! We used to have antitrust laws, and they worked reasonably well. But with regards to wall street, surely there would be ways to prevent the speculation that led to last years meltdown? In fact, I see just above this thread that George Soros wants to investigate some of this. But I think that at some point we have to realize that a company becomes so important to the economy that it can dictate government bailouts on its own terms, we are no longer a free democracy.

The problem with regulation to stop the speculation is that the government will always rely on experts to identify speculation. The experts here were the ratings agencies (whose expertise is specifically recognized in the banking and securities laws) – and they were completely wrong.

Were the companies dictating bailouts on their own terms that important to the economy, or just that well-connected?

Nick

We used to have antitrust laws, and they worked reasonably well. But with regards to wall street, surely there would be ways to prevent the speculation that led to last years meltdown? In fact, I see just above this thread that George Soros wants to investigate some of this.

Soros? The man who broke the Bank of England?

Yeah, he’s exactly the guy to be giving lessons about restraining investor excess for the greater social good.

Jimmy S.: Congress’ America: You own it, you break it.

I hope they break it.

Callous as it sounds, I hope the government whipsaws GM around until the company is unable to produce so much as a roller-skate. That way, the next company that gets itself into trouble won’t be so keen on a bailout.

I basically agree that this is right on a company-by-company basis, but what about network effects? For example, you might (hypothetically) have 10 companies, 2 of which should go bankrupt, 3 of which are teetering but may survive and 5 of which are in various states of health (let’s number then 1 to 10 from healthiest to least healthy for ease). Couldn’t it be the case that if 9 & 10 go bankrupt, public perception of the problems with the industry push 8 then 7 then 6 into bankruptcy? Then maybe 6 then 5 don’t look so good? That seemed to be the thinking after Lehman declared bankruptcy, rather than just (say) JPM was ‘too big to fail’ on its own.

I agree with you totally when it comes to US car companies – right now we should have Ford and whomever would have bought GM’s and Chrysler’s assets.

So, we might need smarter regulation and better enfrocement rather than ‘more’regulations.

“Too big to fail” is a stupid concept and deserves not dicussion but mocking. If you have a machine that takes 5 dollars and generates 4 dollars, that machine should fail … failure is a very good thing.

The counterargument is that, well, the machine (the big company) may take 5 to produce 4, but it has two components: one that takes 1 to make 3 (profitable), and one that takes 4 but makes 1 (unprofitable). Why not preserve the company so that we can save the profitable component?

The answer is: that’s what bankruptcy law does. The idiot management and investors, who tolerated the creation of the disastrous 4-to-1 component, lose their investment, but the profitable 1-to-3 component emerges from bankruptcy, or gets bought in an asset sale. When you have a machine that takes 1 and makes 3, you don’t throw it out. Doesn’t happen. Never happens. The whole theory of the bailout is that failing companies would trash all their profitable components. FALSE.

The solution to big companies that fail is very simple: put them into bankruptcy and carve off the unprofitable parts, letting the profitable parts continue. There are transaction costs to doing this but they aren’t nearly as large as permitting the company to go one losing money.

If there aren’t any profitable parts (which would include profitable in the near future), there is zero argument for letting the company continue at all — liquidate it.

Yes, it really is that simple.

Regarding the supposed failure of the banking system: you may have noticed all the banks that DIDN’T take federal money. That’s 99% of them, and 95% even by business volume. There is almost nothing more fungible than banking services; if one bank fails, all other banks are capable of providing the services of the failed bank. There may be some ramp-up time, but that dimishes — to nearly zero — if they healthy banks can hire the personnel of the dying bank.

If you were going to choose one industry NEVER to bail out, it would be banks, due to this easy substitutability. The failure of the banking system was a fantasy. Billions have been wasted in an unnecessary bailout. Bipartisan billions, sadly.

I am not, by the way, attacking your idea; it may be that there is a point at which firms are so large that their existence poses an unacceptable risk to the economy. I am just saying that antitrust never really prevented that situation.

I haven’t the faintest idea. But I sure hope someone will!

We used to have antitrust laws, and they worked reasonably well. But with regards to wall street, surely there would be ways to prevent the speculation that led to last years meltdown? In fact, I see just above this thread that George Soros wants to investigate some of this.

But I think that at some point we have to realize that a company becomes so important to the economy that it can dictate government bailouts on its own terms, we are no longer a free democracy.

Oh, on the contrary. Stuff like this means that the Representative from Montana now has a good reason to interfere in the retail market for cars. How about protective tariffs on Toyotas? Or maybe a mandate that every car bought has to meet certain government standards, which, strangely enough, only GM cars meet? “Green” standards are the obvious Trojan horse there.

“I’m irreponsible with power” is not exactly the most compelling message.

The cliche about consistency and little minds seems to apply here.

troll_dc2: Martinned: are you saying that government ownership avoids this sort of interference only when the politicians are chosen on the basis of a party list rather than from separate districtts?

Government ownership will always lead to rent seeking, that’s why we generally don’t encourage it. (Ahum…) The additional problem with a district system is that it gives politicians incentives to roll in pork that is specifically tailored to their district, in addition to the usual donor-friendly and lobbyist-friendly pork. That’s how you get bridges to nowhere. In a list system, no one has an incentive to do such a thing. (Unless they’re in the pocket of the construction industry generally, but even then there is less silly construction that can be dreamed up.)

Our America: You break it, you own it.
Congress’ America: You own it, you break it.

Wall Street’s America: We break it, you own it. Then we’ll break it again.

Randy: The only real answer is that we should never let any company, be it on main street or wall street, become so big that failing would have a bigger negative impact that rescuing it.

How do you propose to know when it’s proper to clip a rising company, before it gets “too big to fail?”

However, GM became the proverbial ‘too big to fail’ guy. Had they failed, it would not only have brought down a company, but likely an entire industry sector, including suppliers, dealers, and so on. It would certainly have made the recession much worse, and take longer to recover, and that would have cost us a bundle as well.

In short, no good answers. The only real answer is that we should never let any company, be it on main street or wall street, become so big that failing would have a bigger negative impact that rescuing it.

Our America: You break it, you own it.

Congress’ America: You own it, you break it.

troll_dc2: I note with interest that it does not seem to matter whether the politician is a Republican or Democrat or whether he favors government intervention or opposes it. Do other countries have government ownership of enterprises without such parochial interference with the enterprises?

It’s to do with the way politicians are elected. Whatever the benefits of a district system, one of the down sides is this kind of rubbish.

Equally, maybe even a more, important issue.

{N.B. This post contains simulated, but not real, investment advice. YMMV, void where prohibited.}

The federal government can no more allow Ford to take market share from Chrysler and GM than the states that take tobacco settlement money can allow tobacco companies to be bankrupted by litigation or otherwise.

I have a hard time faulting Rehberg’s position here, nicely articulated in that 2nd quote. The government is supposed to look after its constituents, not itself. Once GM turned into Government Motors, it became just another tool for the government to use in enacting its policies, even if those policies are not good for GM itself.

(Of course the government never should have gotten involved with GM in the first place, but try telling that to the Obama administration currently boasting on CNBC about its “success” in turning the economy around after that 3.53% GDP number.)