CLOates
19 March 2009
Revised: 25 March 2009
Norman, Oklahoma, USA
Business Failure: It's a GOOD Thing
Over the last several years we've been treated to the spectacle of financiers inventing new ways to enrich themselves, while building a house of cards that finally came down in a heap last fall. This IS what people of high intelligence and low wisdom do. There are inevitably going to be some of those in the mix. In times long since past, the result of such behavior was that the perpetrators went bankrupt and were subsequently put to work cleaning out the stalls of barnyard animals, a task much more appropriate to their combination abilities and character.
In the past few decades, though, organizations have grown larger and larger to the point that when the inevitable consequences of the misdeeds of some of them come home to roost, we're faced with either 1) letting them fail and likely bringing down another Great Depression on our own heads or 2) propping them up with hundreds of billions (that's billions with a 'b') of dollars of public debt, borrowed principally from China and the oil-rich nations of the Middle East. The name of this game is "Profits Shared by the Few, Losses Paid for by the Many" (of this and future generations, all on borrowed money!), also known as socialism for the 2% and the rough and tumble free market for the rest. Big business needs the same treatment any of us would receive if we behaved irresponsibly. While individual human beings are usually worth some public effort to save, the artificial creations of corporate law should exist based only on their merits.
Thought: let's do what we can to ensure (that's with an 'e') that we don't get into this unienviable position again. There are several possibilities. One is to somehow prevent organizations from becoming so large that the failure of any one of them threatens the U.S. (and possibly the world's) economy. For U.S. corporations and creations of the U.S. Federal Government like Freddie Mac and Fannie Mae, this may be possible with something akin to the size limitations in the U.S. anti-trust laws. For most organizations, though, the ability to internationalize thwarts the ability of any one country's government to control their size and influence. Countries can regulate the operations of international organizations within their own borders, and to the extent that this can prevent their becoming "too large to fail," regulations should be put in place. The object of such regulation should be to permit the economies of scale which are necessary for efficient operation, but to prevent expansion to the point that failure leads to government bail-outs, as has been our recent fate.
A second possibility is to reglate businesses that become "too large to fail," in much the same ways that permitted monopolies such as public utilities are regulated. This alternative may have to be invoked, given the difficulty of size limitation, but it certainly has a checkered history. Those of you who are old enough to remember paying $0.40 or more per minute (in 1960s money, too) to a regulated(?) telephone company for Texas in-state long distance phone calls will appreciate how able the regulated monopolies are to influence their supposed regulators.
For very large international organizations, the ability to play countries off against one another, very much in the same way that large U.S. corporations play off U.S. states against one another for legislative concessions on taxation and paying for environmental damage, is difficult to mitigate. There is no international body capable of such regulation, and for the moment we seem to be in the same fix as were our forbearers in the age of the Robber Barrons.
For the present, perhaps we should concentrate on putting our own house in order, since U.S. home-grown corporations and particularly the failure of the U.S. Federal Government to appropriately regulate the financial activites of some of these corporations, seem to be responsible for most, if not all, of the current mess.
Whatever we do, it must ensure that businesses that behave irresponsibly (and there will ALWAYS be some that do) are put out of their misery by bankruptcy, not rewarded for their irresponsibility. The theory, as I recall it, is that failing businesses will be replaced by businesses that make a profit by serving the needs of their customers, and not continued in their failures by citizen-funded bailouts and (to add insult to injury) bonuses for the people who caused the companies to fail.
In the mean time, enjoy your and your childrens' multi-thousand dollar per person share of the debt "trickle-down"!
Prof. Oates
Afterthought: perhpas a revision of the bankruptcy laws is in order. It's possible that too-big-to-fail businesses could be effectively and relatively "bumplessly" ushered into operation in receivership and subsequently broken up and sold to more efficient and effective operators. Without some similar mechanism, how will influential, but non-adapting dinosaurs like GM ever be put on a straight course? --CLO
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Grandpa/Prof. Oates
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