The real issue behind saving Bear Stearns: size
A way out of the bailout dilemma? Prevent corporate giantism.
The answer usually turns on the notion that some companies are simply "too big to fail" – the broader economy would suffer if the firm went under. It's an understandable concept, but for too long the exclusive focus has been on preventing failure. Maybe it's time to start preventing bigness, too.
The recent bailout, which Fed Chairman Ben Bernanke defended last week, has unleashed the usual torrent of scolding from the laissez-faire devotees who have criticized previous government bailouts of giant failing firms such as Lockheed, Chrysler, Long Term Capital Management, and big banks that gorged themselves on bad Latin American debt.
Such government intervention, these critics charge, is an abomination in a free-market economy: It nurtures "moral hazard" by rewarding failure, and encourages irresponsible decisionmaking by firms that assume the government will bail them out. It puts taxpayers on the hook for the private mistakes of others. And it is "lemon socialism" when firms keep the profits while taxpayers bear the losses.
Pragmatists, however, point to the size of Bear Stearns – its stature as the nation's fifth largest investment bank, and its entanglement in some $10 trillion of financial contracts – to justify the Fed's intervention as necessary to avoid the catastrophic damage that Bear's collapse could have inflicted on the economy. Failure to save Bear Stearns, the president of a federal reserve bank testified, could have led to "widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole."
What both groups fail to recognize, however, is that the heart of the bailout dilemma in a democratic, free-enterprise society is "corporate bigness." Corporate giantism pits the core principle of private enterprise against the central principle of democratic government, and puts society in the no-win position of adhering to one principle or the other, but not both.
Government can uphold the free-market principle by refusing to bail out collapsing giants and make them responsible for the consequences of their own private decisionmaking – but only by risking broader economic turmoil and violating the democratic principle of government that's accountable to, and mindful of, citizens. On the other hand, a democratic government can respond to the plight of the citizenry by bailing out a collapsing giant like Bear Stearns (or Chrysler) – but at the expense of violating the cardinal principle of personal responsibility integral to the functioning of private enterprise.
Mistakes happen. When they're made by smaller firms, no transcending social dilemma occurs. Their collapse, while tragic for those involved, poses no threat to the economy at large. In the case of a colossus such as Bear Stearns, however, private tragedy is a public catastrophe because the firm is so big and its far-flung operations affect so many. As a result, disproportionately large firms come to be perceived as being too big and too important to be allowed to fail.
This reality, of course, turns on its head the gospel of economic Darwinism preached by laissez-faire devotees. It results in survival of the fattest, not the fittest – survival of the biggest, not the best.
One way out of this bailout dilemma is to make government less accountable and more despotic by rendering it less responsive to the pleas of the affected millions – a highly unattractive option.
A better way – and a more conservative one – would be to prevent such giantism in the first place. How? By seeing antitrust laws as important instruments for limiting a free society's vulnerability to big-firm bailouts.
The consolidation process has raged through most major American industries, from telecommunications and oil to pharmaceuticals and defense weapons. In the banking and finance sectors, the urge to merge has spawned the very behemoths that the Fed is now compelled to prop up.
Instead of celebrating mega-mergers that combine corporate giants, perhaps we should see these combinations as bailout time bombs waiting to explode – and challenge them under US antitrust laws.
We should consider antitrust as more than a policy to promote competition and the economic benefits that flow from it. We should also value it as a vital instrument for upholding principles of private enterprise and principles of representative democracy by preventing too many economic eggs from being consolidated into too few, too big baskets. When those gigantic baskets fail, everyone gets splattered.