Tuesday, November 25, 2008

Financial Crisis: Opportunity Lost???

To whimper that Citibank or AGI or GM is “too big to fail” is the song of small minds. Nero might well have fiddled the same refrain about the biggest empire of his day…or Brezhnev about the biggest of his day. Size confers no moral right to get a pass on taking responsibility for one’s behavior.

In truth, Citibank and AGI and GM and Lehman and Washington Mutual—just like the real dinosaurs—are too big to exist. There was of course nothing wrong with the magnificent Brontosaurus in its element, but when the conditions that enabled Brontosaurus to evolve changed, Brontosaurus had to give way to more adaptable species, leading eventually to the rise of man. Bailing out Brontosaurus as its rich jungle swamps dried and cooled would have neither made sense nor provided a long-term solution.

Similarly, there is no need to make the argument that the massive financial and industrial institutions of early-globalization capitalism were bad. The question is whether or not such institutions are best suited to meet social needs at the present stage of global political and economic development. Justifying what has already snowballed into some $7 trillion of U.S. government (i.e., citizen) commitments to the dinosaurs of our day with the mindless comment that they are “too big to fail” merely shows the superficial thinking of the speaker.

The analogy to dinosaurs admittedly has its limits. One can genuinely feel sorry for the Brontosaurus, which was literally hit by a bolt from the blue in the form of a massive meteor and finished off by (isn’t life ironic?) global cooling. One cannot feel much sorrow for Citibank or AGI or GM, however. We trusted them to gain the sophistication to merit their size and wealth, but they proved that greater size does not generate greater wisdom or even the determination to perform with responsibility and thus pay society back for the extraordinary privileges they received.

Unlike the innocent dinosaurs, our financial and automobile behemoths needlessly created the problems they are in through years and in some cases decades of socially irresponsible behavior. The financial giants knew they were gambling recklessly with other people’s money, as article after article in the daily media is now revealing. American automobile companies did not just thoughtlessly build the most socially irresponsible vehicles they could convince the public to buy, they spent huge amounts of money persuading people to buy their worst gas-guzzlers and spent more money opposing socially responsible government controls.

These institutions are not too big to fail; they are too big to exist. We simply can no longer afford corruption and mindless pursuit of profit regardless of risk conducted at that scale. There is no guarantee that smaller institutions will behave any better, but the collapse of smaller institutions will cause less harm. The degree of concentration of global society is becoming too dangerous, as the lightning global spread of the current financial crisis shows: a well-distributed global financial network would have resilience that the current concentrated network lacks. An institution that is too big to fail is an institution big enough to cause a chain reaction that will destroy the whole system. We cannot afford to allow institutions to become that big.

Of course, we do not want the services provided by these institutions to be lost. Neither do we want the employees all suddenly to be tossed into breadlines. But, contrary to the implication of most public comment, bailing out our Brontosauruses is not the only alternative.

The third choice is to restructure. In order to qualify for a bailout, a company should be required to sign up to a plan that would restructure it into a group of independent entities, each offering a subset of the services of the parent company. The government might choose to support a new green automobile research corporation – a domestic DARPA for public transportation. The government might also choose to support any car company willing to produce exclusively high mileage vehicles. The government might choose to support a bank that agreed to stay out of the mortgage business or a mortgage company that gave risky loans to poor, first-time buyers or a financial company that kept totally transparent books.

The details of how to restructure our industry and financial services to best serve society are limited only by our creativity. The point now is to accept the metaphor of our Constitutional wisdom embodied in the phrase “separation of powers.” American democracy does not rest on American “superiority;” it rests on an institutional structure explicitly designed to obstruct the centralization of power in the hands of any single authority. The Imperial Presidency, which has recently been pursued so hungrily, constitutes a centralization of power designed to undermine the Constitutional foundation of democracy. Those who fight to maintain the legal rights of the legislative and judicial branches against the executive should understand that an analogous struggle now needs to be waged in the industrial and financial sectors.

Rather than “separation of powers,” let us call it “separation of functions.” For one example, banks should be conservative financial institutions above all required to protect account holders’ money. Banks, mortgage companies, Wall Street financial firms, insurance companies, and venture capital entities should be legally distinct institutions with firewalls protecting one type from potential disasters of another type. Perhaps we need to create similar separation of functions for automobile companies. We need, for example, a company that actually wants to build green cars. Perhaps we can no longer afford to have a huge company that produces a full line of vehicles.

Power corrupts. Power makes one blind to the needs of others, blind to the effect of one’s behavior on one’s own future, self-satisfied, insensitive, and vulnerable to suicidal tunnel vision. Massive companies like Citigroup or GM inhibit competition and thus warp capitalism. They are the robber barons of the 21st century, and America needs a 21st century anti-trust law to cut them down to size. A company too big to fail is a company with the power to blackmail society. And we are seeing that the executives of these companies have no hesitancy about doing just that.

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