isen.blog

Wim Buiter has a good opinion on what happened in Iceland. Willem H. Buiter was a member of the Bank of England's Monetary Policy Committee from June 1997-May 2000. He joined the London School of Economics as a chair in the European Institute in September 2005. He is also currently a contributor to the Financial Times.
http://www.nber.org/~wbuiter/iceland.pdf
 

Robert Reich wrote about exactly this about 6 weeks ago. Even the title reflects it:
"If They're Too Big To Fail, They're Too Big Period". Recommended reading.
http://robertreich.blogspot.com/2008/10/if-theyre-too-big-to-fail-theyre-too.html
 

David, there used to be a law against TBTF... it was called antitrust law. By keeping at least three or four major players in every industrial sector, no company became TBTF, and if they did (through bankruptcy, bad management, etc.) then there were still other, healthy, competitors to take up the market (including hiring the laid off workers.)

Its interesting that when Citigroup received billions from the gubmint, it used the funds to buy up healthy competitors in regional markets, to further solidify its presence. In the US, antitrust enforcement was disappeared in the first weeks of the Reagan administration. President Obama has promised strong antitrust enforcement, and let's hold him to that promise.

One of the principles of antitrust law is that firms that are TBTF are a threat to democracy; they can dictate terms to the government and avoid the results of competition and free and fair markets. That is why keeping firms objectively small is an important piece of competition law.
 

Nonick's comment above says that antitrust law regulates (or, more accurately, once regulated) size. My understanding is that antitrust law regulated behavior, not size. A company was not broken up under antitrust law unless it behaved badly by using its size in ways the law circumscribed.

Thus, in my humble non-lawyerly understanding, a big bank might never behave illegally under antitrust law, yet market conditions might still put it in the position to be able to severly damage the economy if it failed.

So I think the idea of outlawing too-big-to-fail is not covered under the concept of antitrust -- it would need new law.
 

David, the blog software said I was posting as Uncle Mike, but apparently it did not register my name.

Traditional antitrust law does regulate size through the Herfindahl-Hirshman index, commonly referred to as the H-H index. It measures size in relation to the other players in a given market, not absolute size. But used as originally intended, the H-H index, or H2 index, can be used to establish an approximate size of a firm in relation to the competing firms, that would it to be below the index threshold. In other words, as originally used, a lawyer or economist could tell a client 'this is too large' or 'this is small enough.'

Another doctrine of early competition law addressed absolute size, and the influence of large firms on the political structures of democracy. Teddy Roosevelt, for one, spoke of this policy in competition law repeadtedly. David, you are correct that it has largely been lost in modern antitrust law, but my point was that this was clearly an important aspect of early antitrust law, and it could be resurrected. In European competition law, it is a much more explicit policy in the law and is taught in university as being one of the major causes (too large firms influencing governments) of WWII.

For myself, I think we are going to be spending some time in the next few years examining US history since 1893 to try and learn why we keep making the same mistakes, and how we can avoid their continued repetition. The Restoration government clearly understands this and I am eager to see how that understanding expresses itself in the next 16 years.

Uncle Mike (Weisman) JD, LLM