The term “too big to fail” was first popularized by Congressman Stewart McKinney in A.D. 1984 during a congressional hearing over whether the FDIC should be allowed in intervene in the Continental Illinois bank problem. But the term didn’t really enter the American lexicon until A.D. 2008 when a number of American banks and financial institutions were threatened with bankruptcy and the government justified supporting those institutions with billions of taxpayer-dollars because those institutions were deemed “too big to fail”.
According to Wikipedia,
“The ‘too big to fail’ theory asserts that certain financial institutions that are so large and so interconnected that their failure would be disastrous to the economy, and that they therefore must be supported by government when they face difficulty.”
It’s interesting to note that “too big to fail” (“TBTF”) is a theory. The principle underlying the TBTF label (that some institutions are so important that they must be supported at any cost) is largely untested, unproven and therefore merely theoretical.
When government designates a particular institution (say, JP Morgan Chase; “JPM”) to be “too big to fail,” government is, at best, merely guessing whether the US would suffer severe, long-term damage if JPM were allowed to fall into bankruptcy. In theory, if JPM fails, America might suffer a financial disaster—but no one really knows if that theory is true or false.
Some believe the TBTF label is affixed with less regard for the health of the American economy than regard for political campaign contributions given to congressmen in the past and likely to be given to congressmen in the future. According to OpenSecrets.org, in A.D. 2012, the financial industry was the #1 political campaign contributor (about $75 million, total) to Congress. If that’s true, the TBTF label doesn’t signal that a JPM failure would collapse our economy so much as signal that JPM is “connected” and entitled (by virtue of generous political campaign contributions/bribes) to enjoy the full benefits of “crony capitalism”.
Would the US economy suffer some damage if JP Morgan collapsed? Of course.
The nation would also suffer some damage if my radio show was allowed to collapse. But would the damage of losing my radio show (no money for me, no advertising outlet for the program’s advertisers, no information for the listeners) be enough to plunge the economy into a collapse?
Similarly, what evidence exists to show that JPM is really “too big to fail”? What evidence exists to show that if JPM failed, the resulting damage to the US economy would be enormous or even unsustainable? Virtually none.
The TBTF warnings are all theory.
“Proponents of this theory believe that some institutions are so important that they should become recipients of beneficial financial and economic policies from governments or central banks.
“Opponents believe that one of the problems that arises is moral hazard whereby a company that benefits from these protective policies will seek to profit by it, deliberately taking positions that are high-risk high-return, as they are able to leverage these risks based on the policy preference they receive.”
Proponents of the TBTF theory don’t argue that the sky will absolutely fall if particular financial institutions are allowed to fail—but only warn that it might.
Opponents (such as myself) of TBTF argue:
1) If the TBTF theory is true, why have any institutions been allowed to grow so “big” as to be even capable of threatening the US economy? Shouldn’t there be laws that protect the economy by preventing any institution from becoming TBTF? TBTF shouldn’t be a “badge of honor” so much as a mark for destruction. Instead of subsidizing any private institution labeled with “TBTF,” shouldn’t any TBTF institution be instantly dismantled as a national threat and before it does something sufficiently stupid to destroy the US economy?
2) The TBTF theory has been recently tested in at least one instance and found to be false. In A.D. 2008, Iceland suffered a financial crisis that ultimately caused the failure of three of Iceland’s major, private banks. Before those banks failed, the Iceland government tried to impose additional taxes on Icelanders to subsidize those banks because they were “too big to fail”. Icelanders rejected that “theory,” refused to pay higher taxes, and the three banks failed. Iceland’s economy suffered serious pain for about two years, recovered, and is now one of the more prosperous economies in the world.
In other words, the adverse effects associated with the TBTF theory have been exaggerated.
Nevertheless, once the TBTF label has been affixed, We The Taxpayers are expected to take responsibility for any debts incurred by these overly-large (and overly “connected”) institutions. If JPM does something smart and makes a huge profit, JPM gets to keep that profit. But if JPM does something stupid and suffers a huge, unsustainable loss, the US taxpayer is held liable to pay for that loss.
• While most people understand how the TBTF label has been affixed to some private financial institutions, not many recognize that the TBTF “badge of honor” has also been affixed to many of our federal agencies.
If the Secretary of the Interior needs a $220,000 personal bathroom, We the Taxpayers must support that payment. Apparently, the Department of Interior is TBTF and can’t function unless its Secretary can defecate in style.
Since federal courts are TBTF, federal court houses need genuine marble walls in their interiors. Therefore, We the Taxpayers must cough up the cash required to keep our judges in the style to which they’ve become accustomed.
If the IRS loses $5 billion to identity thieves in A.D. 2012 and another $300 billion in uncollected taxes, well, no matter—the remaining taxpayers will make up the losses.
More, when Congress threatened to cut the IRS budget in A.D. 2011, the IRS Commissioner warned that such cuts would cause “significant cuts in the services it provides taxpayers and cost the government $4 billion annually in lost revenue.” In essence, the IRS Commissioner argued that Congress had to give the IRS more money because the IRS is TBTF.
And then there’s the Department of Defense (DOD). Now, there’s a sacred cow that’s arguably TBTF. Therefore if $20 billion in shrink-wrapped $100 bills is shipped to Iraq by the Bush administration and $18 billion disappeared, well, these things just happen in the “fog of war”. Stories of $600 toilet seats and over-priced fighter jets have been rife for decades, but always justified by the theory that the DOD is TBTF.
And, of course, everyone knows that the federal government does “so much for so many” that it’s only right that federal employees be paid double whatever they could expect to earn using the same skills in the private sector. More, while private sector works can expect to work until they’re 65 before they receive So-So Security, at least some government workers can collect fat pensions after as little as 20 years of work, and can then retire to live off the public teat for the next 40 years or more of their lives. All of these excessive payments to federal employees are justified by federal employees being essential to the function of the federal government—and by the belief that the government is, itself, the ultimate TBTF institution.
How many of you can even imagine surviving without the feds? The whole idea of a failed federal government seems too fantastic to be possible.
However, our federal government technically “failed” back in A.D. 1971 when it went off the gold standard and started to “discharge” (not “pay”) its debts with a pure fiat currency. Unable to actually pay its debts, our government has been in bankruptcy ever since.
But—amazingly—it has not yet “failed”. Instead, the government grows larger and more imperial. We start an almost endless series of wars for reasons that aren’t reasonable. The federal government is praised by some as the “world’s policeman”. But it’s also regarded as an inveterate meddler in the world’s affairs, and the author of a growing domestic police state.
Why does our government grow and seemingly become more powerful? Because the entire world believes the US government is “too big to fail”.
Why? In large measure, because the US dollar remains the “world reserve currency”.
Despite our government’s tendency to military interventions; despite being bankrupt; despite issuing a fiat currency that everyone knows is intrinsically worthless—the US dollar is still accepted as the “world reserve currency”. Therefore, the world views the US government (the ultimate supplier of fiat dollars) as TBTF—but only because the world’s international commerce couldn’t easily continue if the fiat dollar, and/or the US government, were allowed to fail.
Like JPM, the US government has become TBTF. Just as JPM can afford to take irrational investment risks knowing that the taxpayers will pay for any losses, the US government can afford to risk invading foreign countries, imposing unsustainable laws such as Obamacare, and even converting this nation into a police state.
Why? Because the American people and the world have been conditioned to believe that the US government is TBTF. Therefore, the world and the American people are prepared to “pay” for almost any US government risks that result in military or financial losses. So long as Americans pay taxes without serious complaint and the world continues to rely on the fiat dollar to conduct global trade, the US government will remain TBTF.
Think not? Consider China. I don’t know that China hates the US, but there is certainly a mutual awareness that the two nations are competitors. China holds over $1 trillion in US debt. Therefore, many believe that China could badly injure the US economy if China suddenly released its $1 trillion in US debt instruments into the world economy.
But will China ever suddenly release its $1 trillion?
Almost certainly not.
Why? Because if the US economy collapses, the Chinese economy (still significantly based on exports to the US) would probably also collapse.
Thus, even China deems the US to be TBTF.
Do you suppose that the EU (another major contender for economic dominance) would welcome the collapse of the US economy?
Most of the governments of the world cannot imagine surviving without the US government. The US government has become TBTF.
• Some might suppose that having a US government that’s deemed TBTF is a great advantage. We can be as stupid and reckless as we want and—one way or another—the world will put up our antics and even allow us to proceed without ever really paying our debts.
But there’s a big disadvantage to being citizens under a government that’s TBTF. We’re “held hostage” by our private and public TBTF institutions. If we don’t do exactly as they say, if we don’t blindly subsidize our TBTF institutions, they threaten suicide. The TBTF institutions warn that we are so dependent on them, that if they fail, so do we.
But are we really that dependent on the TBTF institutions? Are we really so helpless that we must simply agree to pay any sum to support those that are deemed “TBTF”?
I don’t think so.
I’m reminded of Iceland. They had banks that were presumed to be TBTF but Icelanders refused to pay those banks’ debts. Their “TBTF” banks fell into bankruptcy and (OMG!) failed.
But Iceland survived. The sky did not fall. The banks that claimed to be TBTF, were lying. They perished and the world continued to turn.
Iceland went through two difficult years, but then began to prosper. In the end, Iceland was better off without its TBTF banks than it was with them.
I can’t help wondering if the same could be true for the US.
Would Americans be better off, more prosperous, stronger—if we disposed of or at least divided our TBTF institutions?
I’m sure the answer is Yes.
If you agree, the first step in dismantling the TBTF institutions is to excise the “theory” planted deep in your mind that you are so incompetent and dependent that you couldn’t possibly survive without the private and public institutions that are currently deemed “TBTF”.
Disowning our TBTF institutions won’t be easy, but we can survive without those parasites.
However, the TBTF institutions—including our government—can’t survive without our mindless support and unending subsidies.
Isn’t it time to stand up like Icelanders—and like men—and refuse to support any TBTF institution? If we do, there’ll be a price to paid but also a gain to be made. We’ll suffer a couple of bad years, and then find ourselves more prosperous and more free.
Some institutions only survive because they’ve fooled you, me, the nation or the world that they’re TBTF. Insofar as we believe that crap, we become slaves to those institutions.
But it’s wrong and even self-destructive to surrender our powers, our rights and our wealth to private and governmental institutions based on the theory that they are TBTF.
We can get along just fine without the TBTF institutions. But those institutions can’t survive without us.
There’s only one TBTF institution in this country: the People. It’s time that our institutions serve us rather than demand that we serve them.