TOO BIG TO FAIL

The term "oligarchy" is bandied about in the public sphere with considerable frequency these days, more frequently than we have heard since the Progressive Era. People who write the kind of stuff I write love words like "oligarchy" or "plutocrat." They are shiny, phonetically pleasing, five dollar words with a distinctly nasty edge. Rarely are these terms used accurately, though. Oligarchy, for example, is often used generically to refer to a group of people who have a lot of power.

Oligarchy, as Webster's and any half-decent Intro to Government textbook will tell you, is "a form of government in which power effectively rests with a small elite segment of society." Perhaps a democratic theorist who studies these things for a living could pick nits with me, but I find this definition lacking. What does "power" mean in this context? Economic power? Political power? Cultural influence? Thousands of different groups or individuals could fall into those categories. Nor does size help us define things. Big and Powerful are often poorly correlated.

A better definition of oligarchy, I believe, is a group of social elites with sufficient power (economic, political, religious, etc.) to destroy the society by their actions. In other words, if society can function without you, you are not part of the club. If it can't, call the printer and get "Reigning Oligarch" added to your business cards. Wal-Mart is huge and certainly society would be affected by their collapse, but we'd be fine without them. We could shop elsewhere. So they haven't quite earned membership to the club yet. They can't credibly threaten to bring the whole society crashing down. You're not an oligarch until you can stare the country in the eye and say "I will fucking end you." And mean it.

For the first 75 years of American history, the landed plantation aristocracy of the South constituted a legitimate oligarchy. They controlled 99% of the nation's export economy (which prior to income taxation was essentially the only real source of revenue for the Federal government) and its food supply. This power was concentrated in an incredibly small number of hands but they controlled states large enough to exercise effective veto power over the entire political process. They kept slavery off the political agenda – and more generally got their way about, well, everything – for decades because the Federal government was weak and they could credibly threaten to secede and do serious harm to the North.

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It is not a coincidence that Washington didn't call their bluff until the balance of economic power had shifted to the industrial North in the 1850s.
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After the Civil War the banks on Wall Street assumed this role.
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Their stranglehold on the country was made apparent in the Panic of 1907 when, lacking a central bank to inject liquidity into the economy, the embarrassed Federal government had to go to J.P. Morgan hat-in-hand and beg him to personally rescue the economy. Like, with his own money. It took the Crash of 1929, however, to shock the government into taking back some of that power from the financial industry.

Now we are right back in 1907. The giant banks, unencumbered by Glass-Stegall, that brought us to ruin have spent the last year and most of the billions in taxpayer bailout dollars getting even bigger. As any decent financial blogger has noted repeatedly over the past year, the bailout did not come with strings attached. Lacking any meaningful financial regulation, the crisis has produced nothing but bigger banks operating much the same as they have been for the past two decades. And when the next collapse comes a few years from now, Congress will bail them out again.

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Because they have to. Because a small number of players control the banking and financial industries and their collapse means the collapse of our entire economy (not to mention the U.S. Dollar).

Thirty years of downsizing, privatizing, and deregulating have left the Federal government too weak to even administer TARP – they contracted that work out to Goldman Sachs. Let that sink in; Washington paid Goldman Sachs to administer the bailout plan for the industry GS helped bring to ruin, not because of crony capitalism but because Treasury simply lacks the power and resources to do it. The phrase "Too big to fail" is nothing more than a tacit admission of being on the short end of an unequal power sharing arrangement.

11 thoughts on “TOO BIG TO FAIL”

  • Grumpygradstudent says:

    Lindblom's discussion of this in Polyarchy is nice (the privileged position of business). Mixed economies rely on businesses to serve a variety of functions. If they go out out of business, they can't provide that function. Even when they're not "too big to fail" at the individual level, they still have us over a barrel to a certain extent.

    I agree that the best thing we could do would be to ensure that no single business's collapse can threaten the economy. We need to do a much better job managing systemic risk. We tend to forget that Keynes's main goal wasn't to "rescue the economy;" it was to soften the extremes that are inherent to boom and bust capitalism. Keynesianism was about managing risk. Seems like we've lost sight of that since Ronny took over.

  • Crazy for Urban Planning says:

    Way to go Ed, those are the precise same thoughts I have had in regards to the whole banking fiasco since it began. If we were going to give the big institutions all that money we should have been willing to kill of the board and the CEO and actually control future bank decisions. No – like you said – we just let them manipulate the situation and become bigger. It seems like the term "oligarchy" can be rightly used at this point.

  • displaced Capitalist says:

    It's Obama's fault.

    What? That's all I ever see on newspaper comment sections so it must be true!

  • I had a few of thoughts about this:

    First, I think that Wal-Mart is too big to fail. Yes, we could all find new places to shop, but isn't Wal-Mart the largest employer in the country? Where would all these suddenly employed greeters and cashiers work? I think we would probably notice a sudden spike in unemployment.

    Second, what would happen if Chase or AIG failed? I'm just curious about this.

    Finally, the Russian interpretation of oligarch might be interesting to discuss in terms of "too big to fail." While the oligarchs are the richest people in Russia and had quite a bit of political influence in the Yeltsin years, the oligarchs have become politically subservient to the Kremlin recently. Largely, this took place because Putin informally banned the oligarchs from becoming politically active (unless they supported him or his party). While conservative elements would totally decry this measure, lobbying reform in this country is something that would probably do a lot to rectify this.

  • I find your definition of oligarchy just as problematic, because it fails to distinguish between who can mess things up by disappearing and who can't be stopped from doing what they want. Obviously, those sets are similar, but they *are* somewhat disjoint.

  • Scott –

    I'm not certain this is true, but I believe WalMart makes a practice of "employing" people by giving them enough hours to not quite qualify for full-time status – you know – with benefits and stuff.

    It's also true that the presence of a WallMart is disasterous for local economies. I suspect we'd ALL be better off is WalMart dried up and blew away.

    Meanwhile, WASF,
    JzB

  • I don't know if you've heard about it, Ed, but there's a movement afoot in the UK to get the govt to impose a "Robin Hood tax" on non-consumer banking transactions. The Youtube ad's been seen by nearly a million people and pretty much everyone I know is keen on the idea. Best of all, it has support from public figures like Richard Curtis (Four Weddings, Love Actually, etc) and the inimitable Bill Nighy, who are behind the commercials.

    Have a look, perhaps the idea could spread to the US, though obvsly, the concept of taxing banks in this country seems to be akin to violating old ladies with jagged prosthetics.

    http://www.youtube.com/watch?v=qYtNwmXKIvM

  • Neal Deesit says:

    "The Wall Street banks are the new American oligarchy— a group that gains political power because of its economic power, and then uses that political power for its own benefit. Runaway profits and bonuses in the financial sector were transmuted into political power through campaign contributions and the attraction of the revolving door. But those profits and bonuses also bolstered the credibility and influence of Wall Street; in an era of free market capitalism triumphant, an industry that was making so much money had to be good, and people who were making so much money had to know what they were talking about. Money and ideology were mutually reinforcing.

    "This is not the first time that a powerful economic elite has risen to political prominence. In the late nineteenth century, the giant industrial trusts— many of them financed by banker and industrialist J. P. Morgan— dominated the U.S. economy with the support of their allies in Washington, until President Theodore Roosevelt first used the antitrust laws to break them up. Even earlier, at the dawn of the republic, Thomas Jefferson warned against the political threat posed by the Bank of the United States.

    "In the United States, we like to think that oligarchies are a problem that other countries have. The term came into prominence with the consolidation of wealth and power by a handful of Russian businessmen in the mid-1990s; it applies equally well to other emerging market countries where well-connected business leaders trade cash and political support for favors from the government. But the fact that our American oligarchy operates not by bribery or blackmail, but by the soft power of access and ideology, makes it no less powerful. We may have the most advanced political system in the world, but we also have its most advanced oligarchy."

    13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak

  • chantingseeker says:

    Ed,

    First, nice blog. It is refreshing, but I also find you as hopelessly dogmatic as the "opposition" you continually bash.

    Like any political term, such as "democracy", "dictatorship", whatever, it has some basic aspects most people can agree on (e.g. for democracy, voting), but when implemented it can begin to have some extreme structural differences. Trying to define and nitpick definitions is fairly pointless. The "power" of an oligarchy depends on the society in question, as well as its size; it is rather obvious it will be presumed to be a small percentage. This is why the dictionary definition is vague. No one can agree exactly on what anything is – and what's the point?

    Really, there is no point because it is /dependent/ on which specific place and time you are discussing. Your blog is mechanistic; you act, like so many others do, as if "capitalism" or "socialism" are /things/, and by enacting these systems, we will necessarily change people. In fact, I can see capitalism working perfectly well if there is a cultural view that the "I" only exists because of the "other". Structures certainly /influence/ people, but they far from determine who they are… the leftist thought you espouse has come a long way. Most Marxists no longer believe the relationship between the economic substructure and cultural superstructure to be a one-way street, but dialectical. One works first with prevailing attitudes and views, and from that will come structural changes that will help reinforce the shift in attitude. "Revolution" now means "cultural revolution", not an overthrow in which the oppressed unintentionally become the oppressors.

    In my opinion, you have the right attitude, but it is misguided. You, like so many others, must learn that the social sciences are important for change or activism. It is not merely enough to ensconce oneself in a specific ideology in opposition to others to have a firm identity and mode of action. Leftist activists must recognize the complexity of life, of belief, and of power.

    For instance, you speak as though the "social elite" in America are a solid group. To an extent, they are, but they are not all conspiring together. Significant divisions exist, there are specific processes by which up and coming social elites are incorporated into their social class and, perhaps most importantly for the ideas in your blog, /they do not perceive themselves as having individual power/. Decisions, when made together, as made as a group. Social elites often deny they have any real power, even if their power is obvious to those subject to it.

    Do you get my point? You, too, generalized and become dogmatic. Your attitude toward politics is the same as those you bash, but your answers and supposed outcomes are different. You are not recognizing the humanity of your opposition, their own complexity, the reasons for their being. If you do not come to understand that, there is no way you can get them to be on your side for a lasting "revolution" that is not merely a further continuation of power and class struggle.

  • The government is like a social entity that seems almost entirely useless to me, except for a means of moving through policy by people who are completely unrelated to the populace.

    SOCIAL IMPLICATIONS:
    Banking is a private enterprise that is melded together with many governments, the U.S. has the Federal Reserve. Our government has someone else print it's money and pays an interest from our Budget.

    So, "TOO BIG TO FAIL" is obviously completely irrational, and not worth actual refutation. It's bullshit that I'm assuming someone in Obama's administration came up with to give the public some impression that sat well with them.

    It seems a reference to banks that are too big to be easily controlled by the fed.

    BUT I DIGRESS.
    The triple a credit rating for the U.S. government said something about "serious changes that could test social cohesion." A statement which I think is a more accurate representation of the reality symbolized in the buzz words "TOO BIG TO FAIL", a phrase which I would call deceitful in intent.

    Scott Raised some good questions. I have no clue how to answer.
    I don't think walmart is too big to fail, and I also don't think we'd be better off if it did. Walmart is an infrastructure for basically distributing huge amounts of stuff over a huge amount of area. It would probably restructure pretty seamlessly as far as consumers are concerned, given the worst.

    Also, Really enjoyed chantingseeker's comments. I love how you delved in the social implications for dogmatism, reminds me of Nietzsche a bit, actually.

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