Why “too big to fail” is bad policy

“If ‘too big to fail’ is incompatible with democracy, it also destroys the dynamism that is the central achievement of the market economy. In principle, there is no reason why disruptive innovations and radically new business models should not come from large, established, dominant companies. In practice, the bureaucratic culture of these organisations is such that this rarely happens. Revolutions in business generally come from new entrants. That is why so many of today's market leaders – Microsoft and Google, Vodafone and Easyjet – are companies that did not exist a generation ago. These companies could not have succeeded if governments had been committed to the continued leadership of IBM and AOL, AT&T and British Airways. ....

There should be a clear distinction in public policy between the requirement for essential activities to survive and the continued existence of particular companies engaged in their provision. There are many services we cannot do without – the electricity grid and the water supply, the transport system and the telecommunications network. ....

But the need to keep the water flowing does not establish a need to keep the water company in business. ....

‘Too big to fail’ – whether the claimant is a bank or an auto company – is not a status we can live with. It is both better politics and better economics to deal with the problem by facilitating failure than by subsidising it.”

John Kay, "Why `too big to fail' is too much for us to take", Financial Times (27 May 2009).

www.ft.com/cms/s/0/4f857c8c-4a2a-11de-8e7e-00144feabdc0.html


John Kay is a financial columnist for the Financial Times of London.

However bad “To big to fail” is as a policy, and it is very bad, even worse is “We can’t let our political supporters fail”, or even worse than that, “We can’t let our friends on Wall Street fail”. Unfortunately, all these seem to be the policies pursued in Washington.

A Tdj by Doug Walker.