Subverting opposition to “too big to fail”
JP Morgan executive appears to say the right thing, but not really:
"If some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail," Dimon wrote on Friday in The Washington Post. "Global economic growth requires the services of big financial firms. It also requires that big financial firms be allowed to fail."
If that's all he said, he would be perfectly right. Capitalism cannot work when the traditional system of rewards and risks have been destroyed by government guarantees. Socialized risks are as bad as socialized economy. The government is not the large corporations' keeper.
However, that's not all that he said, which is what makes me nervous:
Dimon said regulators deserve authority to manage failures of large financial institutions, including the ability to replace management, sell assets, and wipe out shareholders and even unsecured creditors.
Mr. Dimon forgets that by advocating for regulators with broad authority to take over private companies, he is setting up for an idea that is "politically, economically and ethically bankrupt": an idea that the government (and its regulators) are "too big to fail".
Mr. Dimon's idea—of regulators with such broad powers such as replacing managements and wiping out stockholders, destroying the instruments of capitalism that has stood the test of time—may work fine, when the angels govern, anyway. When the regulators' models are perfect, when the regulators' decisions are infallible, and when the regulators themselves are incorruptible, Mr. Dimon's idea of omnipotent regulators will work fine.
But until then, it will not work. Power to shut down companies—with no just cause and with no due process—is too much power for anyone to have. What kind of guarantee do we have to ensure that Mr. Dimon does not use his friendship with regulators to shut down his competitors through regulators, rather than by fairly competing in the market place? What kind of checks and balances are on these all-wise regulators (who predicted and successfully stopped all the recessions and depressions known to mankind)?
Mr. Dimon is right about one thing. "Too big to fail" must stop. It must first stop at the government. There should be no government program that is "too big to fail". The maximum role of government should be protection of life, liberty, and property (i.e. prevention of crime and fraud) and no more.