TBTS - Too Big To Save

The concept of TBTF, as it is now known, or Too Big To Fail has been around since the beginning of the 2008 recession. Or, if you live in Sweden, it originated in the early 90’s, when Sweden had its banking crisis. The hypothesis is that an organisation, often a bank, is too big to be allowed to fail. Why it should not be allowed to fail has never actually been made clear, but in the case of banks, the implication is that, if one shaky bank fails, the public will lose faith in all banks, causing a run even on sound banks. In the case of other companies, such as the SAAB automobile company, the failure would create so much expense in unemployment benefits that keeping the company afloat is an end to be achieved at any cost.

Neither of these hypotheses has ever been stated clearly enough, nor with sufficient supporting documentation, to be verifiable, but since the propounders and the decision-makers are essentially the same people, the theses are taken for granted without further justification, and the arrangements are made which leave the ordinary tax-payer, who has no representative at the negotiating table, as the ultimate guarantor. The question “why?” has been answered with “you don’t want to know”.

As a consequence, governments everywhere have pumped untold billions or even trillions – it is not necessary to specify a currency; the sums are so unimaginable that the unit is irrelevant – into “rescuing” lame companies from the excesses of their own stupidity.

One result of this was the fact that the oh-so-willing governments brought their own economies to the brink of ruin in saving private enterprises with public money, so that we now have an even bigger crisis looming: the failure of nations, and it is to say the least a little thankless on the part of the organisations which earlier were saved by the intervention of those nations that they are far from willing to turn round and help their saviours. In fact one might say that they are actively working towards the destruction of those saviours, with downgrading of their creditworthiness and speculation against their currencies. (As an aside, it strikes me as very strange that anybody takes notice any longer of the pronouncements of S&P, Moody’s and others on the creditworthiness of anyone or anything. After all, these were the people who contributed significantly to the crash of 2008 by grading worthless portfolios of shaky mortgages as AAA.)

Well, now I think it’s time to ask the question “why?” again, and not be satisfied with anything less than a reasoned and substantiated answer. It’s time for us to turn the tables, and propose that some entities are TBTS – Too Big To Save. The idea that, say, a nation must be saved from reneging on its debt because the consequences of so doing would be so severe, is now visibly nonsense. If it does that, goes the explanation, it will not be able to get credit anywhere for the foreseeable future, it will lack finance for public works such as schools, hospitals, etc., and will be plunged into such misery that the citizens will turn to revolt.

Far better to “rescue” it with an IMF loan, which incorporates such swingeing demands for retrenchment that the nation in question is forced to destroy public works such as schools, hospitals, etc., and is plunged into such misery that the citizens turn to revolt. Hm. Sounds familiar.

Now which of these two alternatives is better for the citizens? They are identical – except for the fact that “rescue” leaves them even more in debt than they were at the start, whereas reneging leaves them free of debt and thus better equipped to lift themselves from the mess quicker and more effectively. I won’t say that this is what has happened in Iceland, whose citizens twice refused to pay debts of dubious ethical validity to the Netherlands and the UK, but certain it is that Iceland is now beginning to rise from the ashes of its collapse, which it was forecast would take years if not decades, had they agreed to the demands of the international community.

When we look at the “rescue” of organisations, be they banks or automobile companies, the justification is even thinner. Let us take the case of SAAB, which looks like returning to the “rescue” table any day now. The thought of unemployment benefits for its 4000 employees might seem large, even larger if one takes into account the possible knock-on effects of unemployment in sub-contractors. But this assumes that the SAAB factories will be destroyed at the same time as the company is liquidated, and the land never again be used for any productive purpose.

But what if these high-tech engineering factories are converted – even at a fire-sale loss – to other production? Manufacture of environmentally friendly power-generating equipment has been suggested. A significant number of the employees would be needed to convert the factories to new production, and an even more significant number would be needed to man them when converted, and even the sub-contractors can surely modify their output to suit the new production? So the damage we are faced with is not the total and eternal loss of job for every employee of SAAB and many employees of sub-contractors, but a temporary slump in the areas affected which could be filled with retraining for the new production, when it starts.

As for the banks, everybody hates the banks these days, and there is some justification for the disapprobation of a branch which has even less of a social conscience than the private sector usually displays. However, looking at the banks a little more dispassionately, there is room here to question the hypothesis that the failure of one – or even more – badly-run banks would cause the general public so to lose faith in the system that all banks would fail in the ensuing run.

For one thing, most people are themselves so indebted to the banks these days that it would ill behove them to try and take their money out. The banks could turn round and ask them to settle up their debts first. For another, those who have more money in the banks than they owe to them have nowhere else than the banks to keep that money safe. However liquid cash in the mattress may be, it is far less safe there in these days of deposit insurance than in the banks. As an aside, the very fear of such a run might be enough to persuade the banks to return to a more realistic gearing ratio than the 40 times which is all too common nowadays.

No, I think there are more arguments for my thesis that these organisations are too big to save than for the reverse. But, in the event that decision-makers reject these arguments, there are still strong arguments for a harder line for any organisation, company or nation, which is “rescued”.

I would like to see it generally accepted that one phase of the “rescue” of a company should be that the entire board, and possibly the first ranks of managers, be removed from their posts without recompense (whatever the terms of their contracts), and with reimbursement to the troubled organisation of the last twelve months’ emoluments, both salary, bonus and dividends. That these people be placed under a life-long ban against any form of economic or political activity higher than junior employee, with a sentence of life imprisonment for any breach of this ban. They have displayed themselves to be unworthy of the trust to be placed on persons in such a position.

Similarly with nations: fire the entire parliament and government, with a similar life-long ban against any form of economic or political activity. It’s a bit hard on the members of parliament in opposition, but this sacrifice of a few innocents would at least make sure that the next generation of politicians acted a little more responsibly as representatives of the people who voted for them, and less with the thought of short-term party interests at heart.

If you agree, start agitating for the concept of TBTS. And remember this: nations “rescued” companies in the last depression. Large nations are coming to the rescue of smaller nations now. Who is going to be there when the large nations find themselves in difficulties? Some of them – Germany, the US, even China are already there. The time is approaching when there won’t be anyone or any entity to do the saving, and how far are they going to get shouting “Too Big To Fail” then?

© James Wilde 2015