July 16, 2008
How Things Get Too Big to Fail
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Change the political environment. Recruit more DC Downsizers. Share this message with others.Quote of the Day: "The bigger they are the harder they fall."
-- conventional wisdom
Subject: How things get too big to fail, and what to do about it
When the politicians created Fannie Mae and Freddie Mac they claimed that these institutions would provide stability to the housing market. But neither the housing market nor Fannie and Freddie are stable. Instead, Fannie and Freddie have brought us fear, risk, and uncertainty to the tune of $5.3 trillion.
Only the monopoly we call the federal government has the power to create a $5.3 TRILLION risk.
In a true free market the business of secondary mortgages would've been handled by hundreds or thousands of competing entities. It would've been very unlikely that all these firms would have made the same mistakes at the same time. But our government created a situation where the secondary mortgage business is dominated by just two institutions, Fannie and Freddie, so that any mistakes these two firms make have the potential to harm everyone.
Combine this with a centralized money supply and centralized interest rates set by the Fed, as well as centralized rule making concentrated in Congress and the bureaucracy, and conditions are ripe for disaster.
Even in what's left of the free market economy government contracts and preferential policies help create businesses that are too big to fail. And so we constantly find ourselves at the mercy of the decisions of a small group of people running huge institutions that concentrate, rather than diversify, risk. Just a few mistakes by a few of these individuals can cause a cascade of disasters.
Things become too big to fail because the federal government makes them that way. Failures follow naturally from the concentration of decision making. Government bailouts immunize these "too big" institutions from the consequences of their decisions, thereby encouraging risky behavior. There's even a name for this phenomenon -- "moral hazard." Big mistakes with big consequences become very likely.
Who pays for all these mistakes? You do. Your savings will be damaged or destroyed, through losses and inflation. As a taxpayer, you'll foot the bill for bailouts that primarily benefit the people who made the mistakes.
What can we do about this? We must decentralize our economy by Downsizing DC. This will take time, but it must be done. What do we do in the short term? We must start by telling Congress what we want.
We may, at some point, have a campaign directed at Fannie Mae and Freddie Mac. In the meantime, the proposed bailout of these monstrosities is going to increase the national debt and make it harder to deal with the future unfunded liabilities for Social Security and Medicare. For now, we can use our campaign on that subject to tell Congress what we think.
Use your personal comments to object to the bailout of Fannie Mae and Freddie Mac. Remind Congress that it will increase the national debt. Tell Congress to downsize government involvement in banking, thereby reducing future risk from ventures that are "too big to fail." You can send your message here.
Please also make a contribution to help us grow. We are intentionally designed to thrive during hard times by keeping our operating expenses low. Small contributions and monthly pledges go a long way with us. Choose a contribution amount that fits your budget, so we can keep growing larger and stronger. You can contribute here.
NOTE: If you want to forward this message to others (we hope you do!), or post it on your blog, it's okay to cut out the appeal for funds and the subscription information below the signature. In addition, this message is also posted on our new blog, and you can leave comments there if you so desire.
Thank you for being a part of the growing Downsize DC Army.
Perry Willis
Communications Director
DownsizeDC.org, Inc.
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Posted by Jim Babka at
July 16, 2008 - 01:37 PM |
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Businesses today are also affe
Businesses today are also affected by the economic crisis that we have. Just recently, Gary Sheffield is one of the people that will suffer from a corporate decision to downsize. Normally, major league baseball teams aren't one of the organizations that do so, but the Detroit Tigers decided to release the veteran outfielder and designated hitter from his contract as a free agent. The Tigers are prepared to eat the salary he's still due, about $14 million, as cash advance loans of sorts towards a future draft pick or room under the salary cap. He is one run shy of 500 career home runs, has over 1,000 career RBIs, and is a solid contender for the Hall of Fame, which makes this an unceremonious dumping of Gary Sheffield.
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