Thursday, April 23, 2009

Contrary to Too Big to Fail

The following quote is from John Tamny in Real Clear Markets. Dr. Thurow, who is quoted, spent a day with one of my senior year undergraduate macroeconomics classes and I have been a 'fan' of his ever since.

MIT economist Lester Thurow once observed that, “One man’s security [protection] is another man’s lack of opportunity.” Thurow’s words take on greater relevance today given the seeming reluctance on the part of Treasury secretary Tim Geithner and other administration officials to let banks pay back the protective loans foisted upon them through TARP....

...within capitalist economies new substitutes regularly reveal themselves such that industries as we define them regularly take new shapes. Schumpeter was writing about the retail sector, but as he observed, “the competition that matters arises not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket which are bound to destroy those pyramids sooner or later.”

Indeed, Blockbuster Video was not crushed by a like competitor along the lines of Movie Gallery, but instead by Netflix. When we consider finance, for years retailer Wal-Mart has been panting to get into banking only to be thwarted by many of the same banks presently on life support. Quicken began as a company peddling personal finance software, and ETrade low-cost stock trades, but now both are very much in the loan business. Most in the U.S. think of British retailer Tesco as a retail behemoth, but its lending arm is growing by leaps and bounds.

Looked at from the perspective of banks, it’s quite simply not true that finance would have dried up had one or many big U.S. banks failed. Instead, and as Thurow made clear, their failure would have created an opportunity for substitutes to fill in where their predecessors failed. So while it’s seemingly settled “logic” on both sides of the political aisle that we must empower to an even greater degree the very regulators who proved so unequal to the crises before us, and that occurred on their watch, it seems the better answer is less regulation so that well-run companies inside and outside the financial sector can do what gasping banks could not.

Thurow concluded long ago that “demands for protection” arise due to the abandonment of “belief in the virtues of a competitive, unplanned economy.” His words describe today’s economic environment very well, and as long our federal minders keep offering us false security, the alleged economic recovery will be stillborn thanks to a bipartisan lurch away from the very competitive economic principles that made us so prosperous to begin with.

The above passage perhaps applies even more aptly to the automotive sector as great substitutes currently exist without lingering union problems nor closed plant locations with environmental clean-up legacies. And these substitutes have US plants employing large numbers of US workers. Consumers have already proven the demand for Mercedes from Alabama, BMW's from SC and Honda's and Toyota's from the mid-west. It also troubles me that the US Government is giving financial support to the "big three" (of which two of the three should have filed for bankruptcy already) and not support to the domestic producers with 'foreign' ownership. Is that fair, I ask rhetorically? Did not the Honda Prius represent what the US government wants US citizens to drive?

No doubt the huge support of labor unions for the Democrat party has influenced the decisions of the executive and legislative branches. Perhaps what is too big to fail is political support not certain formerly private companies.

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