The virtue of smallness

In my wildest dreams, I could never have imagined that one day I would wake up to find myself an owner of the world's largest insurance company. Yet, today I and 300 million of my fellow citizens awoke to exactly that, since the U.S. Government has seen fit to take over American International Group in a bailout. Rod Dreher had this to say:

If we live in a world in which the collapse of a single firm-- not even a bank or a manufacturer, but an insurer -- could push the US economy (and no doubt the global economy) into a full-blown depression, are we not all living on the skin of a bubble?

Let that sink in for a minute.

OK. That made me think: what if the very bigness of modern corporations carries within itself the seeds of disaster? Stay with me here, and see if this doesn't ring some bells…

We have been told, and have largely accepted, that we live in a global economy. In this global economy, companies must have vast resources in order to effectively compete. Company A, which does not have the wherewithal to compete on a global scale, must inevitably be swallowed up by Corporation B, which can either leave them as an autonomous division or merge them into the company and incorporate their products/services into their own product line. Increased resources give them the ability to expand, therefore making possible an increased revenue stream. This provides value to the shareholders and makes it possible to acquire Company C.

So far, so good. But what happens when the new ABC Conglomerate makes a few poor decisions? What happens when it controls so much of its market that its failure becomes a problem for the global economy? Previously, if Company A had gone under, Corporation B and Company C would have taken up the slack. But now there is one company where before there were three, and if it falls, it falls hard.

In a way, we're talking about the dinosaur problem. The dinosaurs were at one time the kings of the earth. But they were large, and unwieldy, and unable to adapt to changing conditions. Eventually, a few small, furry mammals proved more adaptable, and ended up basically ruling the planet.

I'm not sure what the answer is. I'm a historian by training, not an economist, and I'm still groping my way through the dark. But to the extent that government economic policy for the last thirty years has encouraged the growth of large multinational conglomerates, it seems to have been unwise. Globalization is problematic, particularly in an era of $100-per-barrel crude oil that is largely controlled by people who don't like us very much. After all, you have to move stuff across the globe somehow --and there is still the issue of dependence on foreign nations for much of what we need. Everyone agrees that dependence on foreign oil is bad, but we haven't yet come to that conclusion about foreign shoes, or auto parts, or anything else.

If we're going to live in a capitalist economy--and for the first time in my life, I'm beginning to see that as a mixed blessing--we should encourage more competition by making it difficult for companies to grow so large that they can take the rest of the economy down with them should they collapse (this would also obviate the necessity for the taxpayers to bail them out). We have antitrust legislation--let's use it. Instead of a few huge national banks, let's have many regional institutions with roots in the communities they serve. And let's temper the greed with some good old-fashioned government regulation in the public interest, so we can begin to reduce the gap between executive compensation and the wages of the average worker. We've let things get a bit too unbalanced. It's time to re-balance them.

And here's some food for thought, courtesy of Los Angeles Times columnist David Lazarus:

Once the Merrill buyout is complete, BofA will rank as the country's largest retail bank, the largest credit card issuer, the largest mortgage provider and the largest retail brokerage. The bank has about 59 million consumer and small-business accounts, roughly $163 billion in credit card loans and more than 6,000 branches.

…Since 2004, BofA has purchased FleetBoston Financial Corp. for $47 billion, credit card issuer MBNA Corp. for $35 billion, Chicago's LaSalle Bank for $21 billion and mortgage lender Countrywide Financial Corp. for $4 billion. And now Merrill Lynch for a cool $44 billion (or maybe a bit less, depending on BofA's stock).

That list, by the way, doesn't include the fact that BofA itself is the result of a merger between NationsBank and the original Bank of America. By my count, that makes seven formerly independent major financial institutions now under one roof, with overwhelming dominance in four separate areas of the financial world. Why are we letting this happen?

Again from David Lazarus' column:

"It can be very convenient having so much under one roof," said Jennifer Ellison, a principal at investment firm Bingham, Osborn & Scarborough in San Francisco, which was BofA's home until the bank and its name were taken over by NationsBank Corp. of North Carolina in 1998. "But if that roof ever collapses, where does that leave you?"