May 2012

With respect to the ongoing series of bailouts, my colleague Iain Murray pointed out that some sensible British commentators note that one of the ways to prevent entities from becoming “Too Big to Fail” is to engage in more vigorous antitrust activity.

I’m very, very skeptical of their idea, however. Speaking of entities Too Big To Fail, perhaps the gravest threat we face now is the federal government’s further collectivizing of risk, and unconstrained assumption of authority over virtually all commerce. The U.S. government is creating vague but omnipotent programs and unaccountable czars with more scale and scope than any imaginable private entity. Indeed, I’d argue that with respect to the trillions of dollars in funding and entities now launched, America isn’t even governable now.

Better approaches to discipline errant market behavior are to reestablish the market’s discipliary forces that government itself, in some instances, has neutralized. Hostile corporate takeovers definitely should return to the world stage; indeed, removing all barriers to the private “Market for Corporate Control” and “right to manage” a corporation are definitely the way to go, rather than antitrust.
No coercive limits on firm size (or CEO pay, for that matter–a silly side-debate on which precious energy is now being wasted) are needed in properly functioning capital markets.

No firm is “larger” than the rivals, upstream suppliers, downstream purchasers, partners, customers, advertisers, future competitors, media watchdogs, trade press, local-national-and-global capital markets arrayed against it if it mis-behaves. Government intervention or “safeguarding” can tend to remove those disciplinary elements, or worse, to collectivize risk artificially far beyond what a free market would permit (thus generating an entity “Too Big to Fail”). We’ve already had a century of central banking and government control of money and credit supply with the TBTF Fed, and more recently, with Fannie and Freddie. The risk now is that the “rescuers” will future centralize risk, kicking decisionmaking upstairs to the Federal government itself, as if it were a commercial credit entity rather than a force-bearing, wealth-transferring institution. That seemed to be the tenor of the Obama press conference today.

Back at ground-level and on a much smaller scale, in frontier industries like cybersecurity and nanotech, government funding and intervention are already removing much of the market disciplinary measures that would otherwise “regulate” risk. So future crises are in the works there too.

Markets and capitalism disperse risk; our failure has been to have too little capitalism and free enterprise, not too much. Unfortunately that lesson isn’t being learned, and the ability to reinvigorate the disciplinary institutions of capitalism diminish by the day as governments assume greater control and powers that will be difficult, if not impossible, to wrest from them.