July 16, 2008
How Things Get Too Big to Fail
By Jim Babka
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.

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Perry Willis
Communications Director, Inc.
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