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DETROIT IS NOT TOO BIG TO FAIL. POOR THEM.
Harold Meyerson's Post column notes one of the more galling policy contrasts going today: The difference between the auto and banking bailouts. As Harold says, the auto bailout "gives the public a stake in the company in return for its loans...scraps the old management and board of directors, and downsizes the company to a point where the government believes it can become profitable again." Conversely, in bailing out Wall Street bailout, "Treasury has not opted for structured bankruptcy, has not converted its loans into shares, has not forced out top executives, has not moved to make banks smaller." Why, Harold asks, is there such a difference? "Could it be that the leaders and folkways of American banking are familiar to the men who run the Treasury, while the leaders and folkways of the American auto industry are not -- meaning that they can assess Detroit more dispassionately than they can Wall Street?"
That could certainly be part of it. And emotionally, I'm sympathetic to that read. But the bigger bit is simply this: Detroit is not too big to fail. And Chrysler certainly was not too big to fail (what happens to GM remains an open question). The auto manufacturers are big enough that we don't want them to fail. But the underlying reality of the negotiations is that we can live without them. They can't live without us. That gave them just enough juice to be saved. But it didn't give them enough to dictate the terms of the rescue.
That's not been true with Wall Street. The bankers know perfectly well that their collapse means our economy's effective end. Worse, their simple resistance means continued economic unrest. You've heard the old line that the market can stay irrational longer than you can stay solvent? Well, banks can hide insolvency longer than politicians can remain popular. And given that the administration does not believe it has the capacity to sweep in and assume control, the banking industry holds a helluva bargaining chip.
The main lesson of all this is that society cannot permit the existence of private institutions that are too large to fail. And that's not only because they might eventually fail and then we are on the hook for their liabilities. It's also because the lesson of the bailouts -- both the auto and banking bailouts -- is that you desperately want to become too big to fail. You get better terms from the government. You're protected from bankruptcy and insolvency. You have tremendous access to the halls of power. You get a seat at the bargaining table rather than before the bankruptcy judge. Reaching "too big to fail" status is like being kinged in checkers. The rules give you special powers and subsidies. Now that those advantages have been exposed, companies will have much more obvious incentives to chase size. Unless, of course, we stop them.
Image used under a CC license from Flynn Wynn..
COMMENTS (13)
I sense growing belief that 'too big to fail' really means 'too big to exist'.
I hope so.
If the gov't could break up Rockefeller's Standard Oil over a 100 years ago, it can handle Citi, JPM, Wells, and BOA.
Let's do a basement clearance sale on the juicy pieces of the Dinosaurs for the benefit of smaller/regional banks.
Posted by: JimPortlandOR | May 6, 2009 11:12 AM
I am more with Harold. We do not know what would happen if we let the investment banks fail. Considering how corrupt they have gotten since they lost much of their fee business I think in the long run we might have been better off without them. The internet could be used to directly link savers with borrowers. Also with stock yields as low as they are equity could replace much borrowing. since the start of the industrial revolution real yields/interest and dividends have been falling at some point the overhead of banks should outweigh the advantage that they have from fractional reserve and move us away from banks as the big source of loans/capital.
Posted by: floccina | May 6, 2009 11:53 AM
Jeez Erza, that is just about as callous a limousine liberal approach to the working class as I can imagine....Are we all just numbers as long as you don’t perceive systemic risk to the economy? Hundreds of thousands of jobs lost and scores of communities economically devastated, not too important? You are one mean dude.
Posted by: Anonymous | May 6, 2009 11:57 AM
"That's not been true with Wall Street. The bankers know perfectly well that their collapse means our economy's effective end."
Sorry Ezra, but you've been totallybrainwashed. Wall Street has very little, if anything, to do with the modern economy, contribute very little, if anything, and it's disappearance would only benefit the real economy. All those folks do is drain cash and stifle capitalism. Maybe in the past their survival was important but not any more. Just let them go and watch the country prosper.
Posted by: mike | May 6, 2009 12:18 PM
Ezra: And given that the administration does not believe it has the capacity to sweep in and assume control, the banking industry holds a helluva bargaining chip.
How convenient for the bankers that the administration believes that. Oddly, many knowledgeable people disagree.
Posted by: alex | May 6, 2009 12:36 PM
A criticism more direct to Ezra's point:
His post is a bull** strawman.
Making banks smaller could have been quid pro quo for saving them-- otherwise they could have been nationalized. There were clearly options that didn't involve the banks "failing" that were less friendly to the banks.
Those options weren't pursued. Harold is telling you why.
Posted by: Anonymous | May 6, 2009 12:37 PM
Of course privileged treatment for bankers has nothing to do with the 5 billion dollars they spent on lobbying in the last ten years.
Posted by: gVOR08 | May 6, 2009 12:48 PM
"That's not been true with Wall Street. The bankers know perfectly well that their collapse means our economy's effective end."
This sentence makes it clear that Ezra is prepping for his job at WaPo.
Posted by: ron | May 6, 2009 2:06 PM
Ezra – I’m Tom Wilkinson at GM, and I wanted to just respond to a few points you mentioned:
The Big 3 might not be “too big to fail” in Northwest DC and Manhattan, but in communities across the Midwest, we certainly are. The cutbacks we’ve been forced into by the global economic crisis have manifested themselves in pretty severe ways in our communities, and some estimates of the effects of liquidation are staggering – 3 million jobs lost and every auto plant in the country idled by supply chain shock. TIME did an excellent piece of photojournalism on the problems Detroit is having – check it out here: http://www.time.com/time/photogallery/0,29307,1864272_1810098,00.html
Speaking for GM at least, we’re confident about the long-term outlook for auto sales and our company’s ability to compete in the future. Auto sales will rebound when other macroeconomic indicators improve – it’s only a matter of time, at this point. That having been said, we’re happy to return some of that upside to the US taxpayer – after all, it’s only fair.
Posted by: Tom Wilkinson | May 6, 2009 3:19 PM
What a load of succotash!
We were told over and over and over by this administation that we couldn't afford to allow GM or Chrysler to go into bankruptcy.
Now, after tens of billions were handed out to support the unions....guess what?
NOW, after the money is gone, it's somehow OK for the auto industry to go bankrupt.
Where's the MONEY?
Show us THE MONEY!!
Posted by: El Viajero | May 6, 2009 4:02 PM
El Viajero: Where's the MONEY?
Yawn. It got lost in a rounding error when they were trying to figure out how much money they've handed to the banks.
Posted by: alex | May 6, 2009 4:47 PM
So the people who make things can afford to fail while the people who make nothing can't?
Did Robert Rubin write this post?
Posted by: leo | May 7, 2009 12:10 AM
i gust want to say some thing "great job"
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Posted by: srdha | May 30, 2009 1:45 AM