Friday, May 1, 2009

Too Big to Fail

Why are we (taxpayers) paying so much money to bailout private companies? Because the failure of those companies would threaten the entire market and devastate society. This is the problem - we have allowed companies to become so large that their failure threatens society. Most of the very large companies have grown to that size through acquisition and merger, not from internal growth. However, when regulators like the ACCC consider acquisitions and mergers, they only consider anti-competition issues. This has to stop.

There are too many companies in Australia which are too big to allow them to fail. The reasons they cannot be allowed to fail include:
  • They provide an essential service for the economy and there are insufficient competitors to absorb the business if the company failed - eg Telstra, Macquarie Airports
  • Ordinary citizens would be harmed significantly by their failure - eg banks, insurance companies, superannuation funds
  • Local economies would be devastated by the unemployment caused - eg car manufacturers, steel industry, mining industry
We are still seeing this corporate elephantiasis occurring. Westpac has merged with St George, the Commonwealth Bank has taken over Bank West. Last year, BHP Billiton was considering taking over Rio to create a mining colossus.

National industry and competition policy needs to specifically consider the risks to the economy of the failure of companies and to develop strategies to manage the risk. Ideally, companies would not be allowed to get so big that they threaten society. If that is unavoidable, adequate prudential regulation must exist to manage the risks. Where the size or the sensitivity of the company makes the existence of a government guarantee implicit (as we have seen with the banks), then that guarantee needs to be made explicit, companies must pay for it, and oversight systems created to manage the moral hazard implicit in these guarantees.

It is essential that we learn from Iceland. We cannot allow any company to get so big that the government cannot protect society from the risks of that company failing.

No comments:

Post a Comment