Sunday, November 2, 2008

"We seem to like bigger."

A post on the Daily Kos by someone called Devil's Tower, don't ask me why, comparing large businesses to dinosaurs:

"That's a phrase that's becoming all too common these days. AIG was too big to fail, so was Bear Stearns, and Fannie Mae and Freddie Mac.

What's the proposed solution for shaky giants too big to fail? Get bigger. Wachovia was too big to fail, so arrangements were made for it to be joined into a bigger entity. The top thing on the automaker's list was loan guarantees that would allow ailing GM to buy also ailing Chrysler. A big part of what the treasury is up to right now is encouraging mergers between financial entities, and even without the prodding of Treasury, these companies are eying each other like students at an eighth-grade dance; sure that their misery would be decreased if they could only find a partner.

The trouble with that is, it's the wrong direction. Mega-mergers aren't the solution to the issue, they're an aggravating factor. And if we don't revise our thinking, we'll soon reach a new distinction: too big to survive. Because the truth is, big doesn't make you safer. Larger equals riskier.

Any evolutionary biologist could tell you that."

I've read "Why Big Fierce Animals Are Rare", but I don't take this kind of analysis seriously.

Here was my comment:

Large means riskier to taxpayers, not riskier (1+ / 0-)

Recommended by:
andlorr

"The trouble with that is, it's the wrong direction. Mega-mergers aren't the solution to the issue, they're an aggravating factor. And if we don't revise our thinking, we'll soon reach a new distinction: too big to survive. Because the truth is, big doesn't make you safer. Larger equals riskier."

This is not quite right. Larger banks are riskier to the taxpayers, because their failures invite government intervention if they fail.

However, under normal circumstances, there are reasons firms can get less riskier by getting bigger and diversifying. Whether or not this is good for the consumer is the object of anti-trust legislation, and other government methods used to discourage monopolies and bigness.

Here's a place that you see the history of bank failures:

http://calculatedrisk.blogspot.com/...

Here's a list of bank failures this year:

http://www.fdic.gov/...

Enjoy.

Trying to make the libertarian Democrat a reality

I mean, there wasn't even actually any analysis of banks.

The truth is that in the short term, it might well be wise to encourage mergers, or the winnowing out of the weak, which would obviously lead to fewer whatevers in the short term. And we've already encountered the argument that fewer banks and competition will make it more likely that the banks in TARP will pay the money back or their shares be worth enough money to compensate somewhat for the intervention.

In general, competition is good, and I prefer smaller to larger. However, in general, I don't like moral hazard, debt, massive government intervention, etc. What we're getting now is a plenitude of moralizing nostrums better suited to calmer times. Right now, after the government has essentially covered all bets, you'd be better off dealing with the wagers, however large and ill-advised they were.

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