Roosevelt Was Right - Extremely Right

Whatever happened to trust-busting?

The past year has seen American capitalism rocked to its foundations as never before.  Not since the Great Depression in the 1930s have we heard Western leaders seriously call into question the underlying principles of the free market; one would have thought that the collapse of the Soviet Union's planned economy would have put that question to rest for longer than it did.  But as the saying goes, the world's last remaining Marxist true-believers may be found exclusively on American university campuses, free to spread their discredited doctrines.

Indeed, popular opinion seems to be drawing exactly the wrong conclusion from recent events: that our current economic upheaval was caused by deregulation, or to be exact, a lack of sufficient government control of the free market.  Nothing could be further from the truth: the proximate cause of the Wall Street crash was the popping of the housing bubble, which in turn was caused by the government forcing banks to loan mortgage money to people who didn't have enough income to pay it back.

Everything else stemmed from this one example, not of deregulation, but of government interference in the market to promote a social cause of helping poor people own houses.

Now we find ourselves watching the giants of commerce and industry fall on every side while the government rushes madly about shoveling out your tax dollars to prop them up.  Everything from banks, to car companies, to airlines, to who knows what is "too big to fail."

That's the one, single, solitary area in which popular opinion is right: There has been a failure of regulation.  Government should, indeed, have been more aggressive in regulation one aspect of the free market.  What's more, it was a Republican who first taught us this lesson.

Teddy Roosevelt was right: There is such a thing as businesses that are too big, and it is the legitimate interest of government to make sure no business crosses that boundary.  A business which is too big to fail is too big to be permitted at all.

At the turn of the last century, American businesses were reaching a size never before approached in all of human history.  A great many voters were concerned with the tremendous wealth and power of Standard Oil, the Pennsylvania and AT&SF railroads, and other great industrial combines.  In some cases, these businesses owned politicians and even whole states' political structures, to the detriment of the common man.

Many ordinary folks suffered from the high prices and poor services of the business monopolies that served their location.  For one famous example, it would often cost a rural Minnesota farmer more to ship his produce locally to Minneapolis on the single rail line that served his hometown, than onwards across the continent to New York where there were several rail lines offering competition.

T.R. famously whipped out his big stick and brought it into use as a "trustbuster," requiring fair and open competition, and cutting national monopolies down to size.  This was attacked at the time as an assault on free enterprise, but in reality it was promoting the creative destruction and sharp competition that is supposed to be a hallmark of capitalism, and which leads to better, cheaper service via innovation all round.

In recent years, the government has been reluctant to attack monopolies, and not generally successful when they've tried.

The world of the 21st century is very different from that of the late 19th; lack of competition is not really the problem, and even the most well-established and powerful corporation can instantly be upended by a disruptive new technology.  The monopolistic trusts of the Bull Moose era were a serious threat to liberty and to the middle class of the day.  Modern big companies do not threaten liberty in the same way because there are more ways to make a living, and lots more people trying to do so in the same market space.

That's not to say that huge companies are no threat at all, however.  Recent events give us a new reason why extra-large super-sized companies are dangerous for national economic health, even if they are still competing fiercely against foreign competitors or other similar giants: If a single company's failure can cause consequences so grave as to imperil the national economy, that company is too big.

The "too big" excuse has been used for Fannie Mae and Freddie Mac; for the insurer AIG; for Bear Stearns and the other great investment banks; and now for Citigroup.  And the most worrying aspect is that the excuse is valid: Fannie and Freddie, between them, do indeed underwrite the vast majority of American mortgages; AIG does, in fact, provide a tremendous percentage of the world's insurance products and Citigroup has its fingers in every financial pie there is.

If they fail, there truly is a systemic risk of the whole system going down with them.  No President could or should allow that to happen.

No, the real failure is in letting the situation arise in the first place.  It does not matter how well AIG or Citigroup are run, or appear to be run.

The proper question for the Federal Trade Commission and the Department of Justice when considering a merger is, what would happen if the resulting behemoth went bankrupt?  If the answer is "we all die," then the merger should have been disallowed.

But it wasn't.  Now we're stuck having to rescue billionaires to save our own skins.

In so doing, we're doing it exactly the wrong way: If our tax dollars must be spent, we'd be better off straight-out nationalizing the banks, then selling them off in little pieces over the next few years, making sure the resulting companies stay small enough that losing one wouldn't hurt too much.

It's funny that, for all the erroneous charges of regulatory laziness, the one area where our government regulators were, in fact, lazy is the one where they're let entirely off the hook.  Figures.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments
While I can agree that the loss of any of these companies could, at least in theory, bring down the economy as a whole. I can not agree with you that it is the right thing to prop them up.

While the pain would be great in the short term it is absolutely necessary to burn off the chaff so that the next years crops can grow. The chaff in this case is all the huge businesses that make it nearly impossible for a start up to make money. Yes the next few years would be hard for us all but as long as the government stays out of it and lets the private sector do what it does best, make money, then the depression (that it would likely be) would be short and the recovery after it would produce a healthy economy completely unlike the unhealthy economy that we currently have.
January 6, 2009 8:38 AM
Kelyon's point about the cancer of bailouts spreading is true. The worst thing about bailouts is that the businesses are then run politically rather than profitably. Reuters reports

that many, many industries are lining up for government protection. It has nothing to do with size, of course, it has everything to do with political connections. sen Dodd got a sweetheart loan because he ran the committee that oversaw banking. Now that the government owns the banks, loans will go to the politically connected.

let the market decide!
January 6, 2009 9:48 AM
The point is not that we should be bailing out the companies, and surely not their owners. But we cannot just let them collapse in a heap either right now. By far the lesser evil - still an evil, but lesser - would be to do as we did fairly successfully during the S&L crisis two decades ago: nationalize, then liquidate.

And in so doing, carefully eye all mergers and acquisitions to ensure that never again do we permit ANY financial firm to reach such size that its instant collapse would pose a risk to the entire system. That's the real problem here. We need more, smaller competitors, so the loss of any one of them won't destroy everything.
January 6, 2009 10:08 AM
"We need more, smaller competitors, so the loss of any one of them won't destroy everything."

I could not agree more. But this is a hard pill to swallow for free market conservatives. You are asking the government to limit free market growth once it reaches a certain size for "the greater good". A shiver just ran up my spine. But I do agree.
January 6, 2009 10:22 AM
ALL laws are a balance. The MAIN error we've seen in our polity is the assumption that any law or court decision can end an issue forever. Pro-aborts thought that Roe v Wade would settle the issue, but it did not; people's opinions change.

The free marketers are wrong to believe that the market can be left totally to itself; I don't know anyone who does not believe in insuring bank deposits. The government is the solution people are wrong to believe that government can actually do anything effectively any more, except maybe fight wars.

Government can mitigate the damage of free market errors by providing, say, bank deposit insurance, but last time banks went wild with risky lending, bankers went to jail. This was a worse mess and nobody is even talking about jail for anyone, not even for the folks at Fannie and Freddie who bribed Barney Frank and Sen Dodd.

Government can't even regulate properly - The SEC was warned about Madhoff over and over, and did nothing. They required that investments be rated by rating agencies, but the rating agencies were totally sucked in.

Government can't fix anything much and it can't do anything effectively, all it can do is try to mitigate the damage. Unfortunately, that's become completely political; you get bailed out of you're connected.
January 6, 2009 10:55 AM
Add Your Comment...
4000 characters remaining
Loading question...