No time for a long post today, but I can’t let the AIG takeover go without some comment. I am wondering what the government’s buyouts will mean for the future of big business in the U.S. For example, is this “Socialism, 21st Century Style”? Or the inevitable result of a government bent on both protecting its citizens from economic roller coasters, and also allowing big business to grow as much as it wants? Suppose we believe that a business can be too big to fail – that is, that any business of sufficient size will be bailed-out to avoid catastrophic collapse. Then, doesn’t the government have an incentive to prevent businesses from reaching that size (or at least, not favor it)? As soon as a business crosses the “TBTF” threshold, the government is forced to assume (with no particular payoff to itself) the role of lender of last resort. As the refusal to bail out Lehman Brothers shows, attempts to refuse this role may or may not be greeted well by anyone (including other failing firms).

So, doesn’t the TBTF problem suggest a policy of rabid anti-trust enforcement? Or, to put it another way: many economic models assume (for the most part) that firms (and individuals) have zero power, that firms and individuals are all price-takers with no capability to unilaterally influence the market. Does the TBTF problem give government a good excuse to act to make those models assumptions’ true? A firm that can substantially alter the market will presumably also be one that is too big to fail.

In general, I think of this as a “lumpiness” problem. Economic life as we know it is filled with lumpy actors but smooth models. This is, of course, an unfair generalization. I’ll let you know how it stands up to further digging into the econ literature.