Too Big to Fail

In September of 2008, barely two months before the election, it appeared that America’s biggest financial institutions were about to fail. One of them did. In the opinion of a bipartisan majority of the powers that be, our monetary system was in danger of complete collapse if drastic action was not taken. That majority included the Republican President, majorities of both parties in the Senate and Democrats in the House. The result was TARP government loans of $700 billion to the endangered institutions, much of which has since been repaid.

Several months later, with Democrats now in control of the executive branch, the nation’s economy had avoided calamity, but was still struggling. Using the same basic reasoning, a roughly equivalent amount was loaned to similarly distressed enterprises in an attempt to hasten economic recovery. This time, despite the obvious similarities to TARP, the Congressional vote on the measure was divided along strict party lines.

The fact that a financial meltdown hasn’t taken place doesn’t prove the claim that one would have in the absence of these preventive measures. Still it defies common sense that the organizations receiving government help seem hell bent on repeating the practices engaged in during the years closely preceding the emergency. Since so many Congressmen are virtually on their payroll it becomes that much harder for unencumbered legislators, who voted to help them when needed, to make them agree to discontinue these practices, the way a parent would a child who has just been rescued from trouble.

As with the logic behind the bailouts, the notion that these institutions are too big to fail seems obvious to most people who aren’t beneficiaries of the corporations in question. Without legislation limiting their size and scope they will continue to become even bigger. Reinstating the l933 Glass Steagall act separating commercial from investment banking would be only a part of a necessary beginning.

Like the claimed benefits of the TARP loans the dangers of the size of these institutions can only be proved after the fact, if then. If we’re looking for something provably “too big to fail” all roads lead to a hole in the ground a mile down in the sea.