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By “too rich to go bankrupt” I don’t mean someone so rich that they never will go bankrupt. What I mean by that is someone so rich that them going bankrupt would destabilize our economy and thus they deserve a bailout if bankruptcy ever threatens them. (Think Bill Gates plus Warren Buffett plus everyone who gets a paycheck from Google.) More on that later . . .
In discussing the role of the federal government in an economic recovery Ronald Hunt and Charles D. brought up the issue of the role of corporations. Charles was good enough to provide links to a 2-part article by Richard Grossman from 1998 (Part 1, Part 2) that did a good job of discussing how corporations have turned into very unwieldy masters over “we the people.” I was amazed when I first realized that these articles, which are so pertinent to our situation of bailing out “too big to fail” institutions was written more than a decade before our massive Bush bailouts.
I especially enjoyed a couple of quotes from the second part of the article:
the Supreme Court of Georgia, in Railroad Co. v. Collins, wrote: “All experience has shown that large accumulations of property in hands likely to keep it intact for a long period are dangerous to the public weal. Having perpetual succession, any kind of corporation has peculiar facilities for such accumulations . . .” (emphasis mine)
And from the end of the first part:
In Richardson v. Buhl, the Nebraska Supreme Court in the late 19th century declared: “Indeed, it is doubtful if free government can long exist in a country where such enormous amounts of money are… accumulated in the vaults of corporations, to be used at discretion in controlling the property and business of the country against the interest of the public and that of the people, for the personal gain and aggrandizement of a few individuals.” (emphasis mine)
In the next century we can see how the situation has been turned on its head as the dissenting opinions of a case remind us of what the truth from those earlier majority opinions
Justices White, Brennan and Marshall, dissenting in First National Bank of Boston v. Belotti wrote: “It has long been recognized, however, that the special status of corporations has placed them in a position to control vast amount of economic power which may, if not regulated, dominate not only the economy but also the very heart of our democracy, the electoral process… The State need not permit its own creation to consume it.”
Chief Justice Rehnquist, dissenting in the same case: “…the blessing of potentially perpetual life and limited liability, so beneficial [sic-R.G.] in the economic sphere, poses special dangers in the political sphere.” (emphasis mine)
With that complete reversal of situation, where the consistent majority opinions of the 19th century are suddenly being expressed in the dissenting opinions of the 20th century, how do people react to the dangers of corporations?
Folks relentlessly tally corporate assaults, study the regulatory agencies and try to strengthen them. We try to make corporate toxic chemicals and corporate radiation and corporate energy and corporate banking and corporate agriculture and corporate transportation, corporate buying of elections, and corporate writing of legislation, and corporate education of our judges and corporate distorting of our schools, a little less bad.
Isn’t it an old story? People create what looks to be a nifty machine, a robot, called the corporation. Over time the robots get together and overpower the people. (links to examples mine)
Now the question is, what is it about the nature of corporations that that makes them so dangerous? Besides the issue of perpetual succession mentioned above, there is this truth which can be verified by even a cursory glance at any information about forming a corporation:
Why do we hang on to the hope that the corporation can be made socially responsible? Isn’t this an absurd notion? After all, organizations cannot be responsible. This is just not a relevant concept, because a principal purpose of corporations is to protect the managers, directors and stockholders from responsibility for what their corporations do. (emphasis mine)
Grossman follows that truth by declaring this as the solution to the problem he has just illuminated for us:
But only people can be responsible. How? By defining ourselves as sovereign people so that we then can define all the corporate bodies that we create (governmental, business, educational, charitable, and civic).
We the People are the ones who must be accountable. We are not accountable when we create monster robots which run rampant in our communities and which, in our names, sally forth across the world to wreak havoc upon other places and upon other people’s self-governance.
Grossman is right in his illustration of how we have been (and continue to be) irresponsible. We have already declared ourselves sovereign legally (in the Declaration of Independence and the Constitution) but we need to begin thinking and acting like sovereigns within our political and economic system and wrest control back from those we have meekly deemed “too big to fail.”
To get back to the idea of “too rich to go bankrupt,” I have a couple of questions. First, is there any such level of wealth where we would consider someone a threat to the entire financial system? What if there were a single person who controlled half of all the wealth in the nation (that is about the total wealth of the most wealthy 3% of individuals in this country). With controlling interest in the nations overall personal wealth would they then be too big to go bankrupt? Second, if there is such a thing as too big to go bankrupt, how would we respond to a person who reached that threshold (whatever it is in your mind)? Third, what steps would you consider reasonable for the law to prevent people from becoming that rich if we truly thought it was possible?
Personally, I don’t think there is any threshold where a person can be so rich that they are a threat to the system simply based on their wealth but we have declared that some corporations are just that big and we either believe that they have more rights than a person or we must decide what a reasonable course of action would be if there were a person in that position.
10 replies on “Too Rich to Go Bankrupt”
This is why I do not for a moment believe in free-for-all “capitalism”. That is as much to threat to liberty as any runaway government or standing army could ever be. Ambrose Pierce got it right when he defined a corporation as “an ingenious device for obtaining profit without individual responsibility”.
What do you mean when you say “free-for all” capitalism? If you mean capitalism without any government oversight (as opposed to manipulation) then I agree – capitalism divorced from human decency and fair play is hardly an ideal we should strive for.
That is exactly what I’m referring to. So many people take the small-minded approach that if you just do away with all regulation, the problems will solve themselves. It’s just as idealistic as the polar opposite who think that government will always do a better job.
Exactly. As a free-market proponent I know that my arguments get mis-characterized sometimes to appear as if all regulation is bad. I suspect that anti-deregulation people feel the same about their arguments at times – most of them probably recognize that they would not care to have complete government ownership of all economic interests (communism).
I agree that there is no “to big to go bankrupt” threshold. If a business takes too many risks and ends up bankrupt, then that should be their tough luck, not a problem for the taxpayers.
The underlying problem is that government (being the only force strong enough) must prevent banks, insurance companies or any other corporation from becoming so big that its bankruptcy damages the economic security of the nation. That’s why we have (and used to enforce) anti-trust laws.
It seems to me that the question of ownership you raise in the last comment should be driven by utility and cost and the nature of the product or service. I make a distinction between products and services that are absolutely essential and those that are optional, considering the former better candidates for government ownership or tight regulation than the latter. If a service is essential and private companies are providing it efficiently to all who need it, then I would leave it in the private sector. If a government run service can be provided cheaper over the long-term by a private entity with no loss in quality then privatization seems appropriate.
Your first two paragraphs are contradictory – there is no “too big to go bankrupt” threshold but government should prevent anyone from becoming too big. Anti-trust laws were about abusing their position not so much about the stability of the system (monopolies tend to be rather stable).
As for government ownership of services – I can’t think of any service except a basic interstate transportation system, the postal system (not that that could not be done privately in this day an age), and national defense that have any business being managed at the federal level. All other services that might reasonably be in the hands of government seem best suited to more local government.
You misunderstood me I think. While I don’t think any institution is too big to go bankrupt, we have to acknowledge that some institutions have become so intertwined and so powerful in our financial system that their failure threatens the economy as a whole. It is government’s responsibility (IMHO) to insure that our nation’s economic stability is not subject to the unregulated speculation of single private institution.
The decision about whether a service should be provided/owned by local, state or national government should be made on pragmatic bases. It obviously makes no sense to provide fire protection at the national level, but at the time the Constitution was written, national defense was relegated to the states and a standing army was not considered desirable. Times have changed and what was workable and efficient in the 18th century would be dangerously inadequate today. My point is that I prefer to make decisions about the proper level of government based on what works. The issue of unequal availability of services from one state or locality to another needs to be addressed, but that seems to far off topic here.
I think I understand you now and more importantly I think I understand my own perspectives and assumptions better after reading your comment. You say that it is the government’s responsibility to insure that our nation’s economy is not subject to the fortune of single private institution. I understand that position and I believe that the majority of people would agree with you – I also think that is an unsafe and unreasonable expectation. Reality dictates that it is the responsibility of individual businesses to ensure that their own material position is not too dependent on the fortune of any other entity. This is true of states, businesses and individuals. It is not the job of government to ensure that my material needs are met – that is my job and I need to make sure not only that they are met today, but that I am able to provide for myself even if the company I work for falls on hard times (or makes bad choices). There is nothing wrong with me working for/with a company, but it would be foolish of me to expect that they or anyone else is responsible for my material needs. No institution can threaten the economic stability of the nation if each institution is carefully ensuring, through their own choices, that they can survive the collapse of any of the institutions they interact with.
By the way, if I am reading your comment right you are wrong about the national defense situation when the Constitution was written. Under the Articles of Confederation it was pretty much relegated to the states, but the Constitution placed national defense squarely on the shoulders of Congress even if the state militias were expected to address any immediate threats until Congress could act to protect the nation.
Individual institutions, particularly publicly held corporations, don’t always do what it reasonable and certainly don’t have the interests of the larger economy or the national interest in mind. They are properly looking out for themselves and sometimes they make very big mistakes. When those mistakes cause harm to innocent parties, some entity has to step in. The Wall Street banks that got involved in credit default swaps and exotic derivates didn’t live up to their responsibility, so what happens then? Do we let them fail? If 1st National of Bountiful goes belly up, the FDIC closes the bank, insures deposits up to $200K, and hopefully sells the assets of the bank back to a private owner in short order. What if that happened to Citibank, Chase and BofA all at the same time? It could have (or at least that’s what we were told). Sure they were all acting in bad faith, making stupid decisions and abdicating their responsibilities to their shareholders, but should we sit back and allow the entire banking system to collapse? It would be great if we could just make individuals (including individual corporations) responsible for their actions and leave it at that, but when large numbers of innocent people suffer if a few huge institutions act irresponsibly, then it behooves us to prevent institutions from getting that large.
You’re right about the Constitution, I was referring to the fact that many of the Founders were opposed to a standing army and the Constitution did not contemplate a large full-time military force under federal control. It was assumed that Congress would provide money to raise and train an army and navy should the need arise.
I was not suggesting that individual institutions did or even should have the interests of the larger economy in mind. I was saying that they should take a larger view of their own interests and not entangle themselves so much in their dependence on other institutions that the failure of those outside institutions would cause them to be caught in a domino effect. Let’s take the situation that you cited with Citibank, Chase, and BofA all falling simultaneously. First, it is the responsibility of BofA to make sure that they don’t fall because of the failure of Citibank and Chase (likewise for those two). Second, it is the responsibility of all those who are invested in any or all of those banks to do everything in their power to ensure that they would survive even if those banks were to fail. And finally, its too late to say that we won’t bail any of those banks out – we already did – but what we should do now is tell everyone “go make yourself independent because if we ever get to the point again that any or all of those banks (plus AIG, GM, etc) come to the brink of collapse we are going to let them fail.”