Too Big, Not Too Big To Fail

Nov 12, 2008 Michael Wurzer

Worldwide economic concerns are not the usual fodder for the FBS Blog, which is focused on the narrow vertical of the MLS industry.  However, another topic of interest here is employee ownership, as FBS is a 100% employee-owned company.  We’re a small company, with just 40 employees.  Fortunately, we’re also a successful company.  So it is with detached concern that I, as the CEO of FBS, watch the economic calamities of the world’s gargantuan companies unfold in ever widening waves.  I ask myself:  Why should stupid decisions of a few executives and bureaucrats impact us, whether it be the result of the failure dragging down the economy as a whole or as a result of “bail outs” requiring more and different taxes from government?

The mantra is that these companies are too big to fail, which, for me (and others), begs the question of whether they are simply too big.  Markets are efficient only when there are many buyers and sellers and information about the market transactions is readily available to all.  In the case of the current crisis, both of these pillars of efficient markets were missing. The credit risks were continually repackaged until only a few very large institutions were carrying huge amounts of risk and the information about those transactions was anything but transparent.

Now, as the dominoes fall, we’re continually chasing after them trying to prop them up.  We’ve gone from insurance, to credit and now onto auto-makers and auto-dealers, local governments, and who knows what else.  We seem to have forgotten that failure is critical to efficient markets so that pricing can adjust.  Tim Bray, a technologist at Sun Microsystems, writes today about his “severe anger at the financial professionals who paid themselves millions for driving the economy into a brick wall at high speed, then walking away while we pick up the pieces.”  I’m not feeling angry but I am concerned.

How is it that we’ve entrusted our money to people who’ve created systems so complex that they allow us to delude ourselves into thinking that only experts on Wall Street can understand them?  Nothing should be so complex and if the so-called experts cannot make them transparent, that likely means they are not the experts they claim to be.  In his post The Visible Hand on O’Reilly Radar, Dale Dougherty makes a similar point:

Wall Street hired the best and the brightest, paid them handsomely, and gave them unlimited resources and technology. It turns out they were building enormously complicated castles made of sand. A great wave washed them away, astounding all the smart people who devoted their lives to speculation, not production. Their models based on historical data predicted future profits, not collapse.

Dougherty is making another point in the quote above with which I don’t quite agree, but it does lend toward something useful.  By differentiating between “speculation” and “production”, Dougherty is suggesting that one has more value than the other.  I disagree with that.  Speculation or risk diversification, if you will, is as much of a product with value as a building or a car.

On the other hand, the idea that we, as individuals, need to be making more stuff is important.  We need to be producers, not just consumers.  We need to be capitalists (those who own and create capital).  At the core, much of the economic crisis at hand is due to the separation of risk and reward.  The folks selling the mortgages to whoever could sign weren’t responsible for the failure in payment, that risk was shifted off to others and ultimately onto the tax payers.  When we start considering shifting the risk of the poor decisions over decades from the American auto-makers and their stakeholders onto the American public, we know that this separation of risk and reward is going too far.

The issue here is one of being a country of independent creators, owners and risk takers-absorbers, or infinitely dependent consumers.  Over the last many decades, we’ve succumbed to becoming so segregated into areas of expertise that we are forced into more consumption than production.  We no longer understand the specialties and expertise of anything but our little niche, and so we’re dependent to an unhealthy degree.  To be clear, I’m not suggesting that specialization is a bad thing or should go away, but rather that each of us needs to be more responsible for ourselves.  Each of us can insist on understanding enough to make independent and informed decisions.

Tim O’Reilly also wrote recently in A Critical Choice Regarding Innovation that he “believe[s] that the choice is stark: just give people want they want, leading us deeper into a consumer culture whose very financial fabric is wearing thin, or seek out big, hard problems that other people take for granted as unsolvable, and remake the world.”  He concludes the post with a call to arms of sorts, for individuals: “[T]he Knights of the Round Table were the archetypal myth of Western civilization, the idea that each of us, alone, must go off into the deepest, darkest part of the forest, populated by monsters, on a quest to make the world a better place.”

Indeed, what is missing from our economy and culture today is individual responsibility and creation and ownership.  We need to be owners, each of us.  No more bailouts, for anyone.  The freedom that Martin Luther King spoke about so eloquently was the freedom to fail as much as to succeed.  If someone or some thing is “too big to fail”, then it simply is too big.  We need our failures to succeed.