Is Big Ugly?

The precipitous year-on-year decline in value, be it real estate, stock market evaluations and worst of all morale of the populace, has been called ‘meltdown’ by economists and has created mortal fear among our leaders. Trillions of dollars have been poured in financial institutions to save them from bankruptcy and the nations from financial collapse. While this may have been necessary to save the global financial system, it has been done in a hurry without any conditions imposed on the distressed businesses and without any serious study of the causes and the future implications.

There are two important considerations while looking at the root cause of the meltdown. First, the biggest fall was in the assets which had the biggest rise in preceding years and the current evaluations of these assets, with some sorry exceptions, reached where they were a few years ago. It is not difficult to understand this although understanding does not reduce the pain of recent investors. Ever since the advent of Reagan era, controls on business have been relaxed and growth has been the mantra of governments led by short sighted economic advisors. This growth led to inflation in valuations which grew at exponential rate. This encouraged ever more risky lending for consumption and to irresponsible businesses. Financial ‘instruments’ of immense complexity were developed to hide the risks, which in turn led to higher growth. Many long time investors understood that such growth in valuations was unsustainable and had to correct some day. That happened in 2008. With this correction the values of real estate and most businesses declined to what they were a few years ago, arguably what they would have been if growth rate had not been inflated artificially by reckless lending and consumption. This decline exposed the worthlessness of the ‘instruments’, risky loans became unmanageable burdens and the financial system threatened to collapse.

Second vital consideration is that the industries which needed desperate measures to save them, and whose values were demolished, are the ones with biggest concentration in very few hands, financial institutions and auto manufacturers. The size of these corporations allowed them to indulge in megalomania. They could bypass regulations with impunity; obtain unreasonable conceissions from smaller governments under the threat of moving their plants elsewhere and from their home countries so they could ‘compete in global economy’. Canadians can count themselves fortunate that successive governments resisted bank mergers and they never became so big as to threaten the economy by their collapse. Moreover, they could be regulated into relatively sensible lending practices and therefore they are not the basket cases like most giant American and European institutions. The industries where ownership is widely scattered are also suffering the decline, media and forestry for example, but finance ministers are not offering them a cent because they know that any failures would not be critical and the mess would be mopped up by other businesses any way. This consideration should lead to the belief that wide spread ownership is critical to future stability of capitalist economy; in fact this is what makes capitalist system better than other systems. To achieve true competition and sustainability, capitalist system needs to have many companies of reasonably comparable size in the same arena. To ensure this, governments need to have regulations with teeth that reduce monopoly on national scale wherever practical.

The two considerations lead to an idea which is anathema to many. The ‘meltdown’ is a long overdue correction to the excesses of the past two decades and if properly handled could lead to growth at a smaller but sustainable rate. In order to achieve this we must ensure true competition by ensuring that no business is, or becomes, so big as to eliminate competition and, more important, threaten the system when it fails for whatever reason. Small may not always be beautiful but the big is sure ugly when it is lying helplessly on its back.

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