On Failing Large Companies and True Risk

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Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government. – Milton Friedman

In a capitalist society, big companies need to fail.  It refreshes them, it refreshes the market, and it makes us stronger. However, let’s make it clear, these failures does not actually benefit “the individual ” investor.  It does not help the employees of these large companies and it does actually any government.

 

One of the main point arguments for letting these large companies and business fail is that it is what should happen with the market.  It’s the risk and reward of the Market and when corporations make risky decisions, they are appropriately punished. 

 

Let’s change track for a moment.

 

In a perfect world, individual shareholders have a purpose.  They would get together and appoint a Chairman, and board members who would then choose a CEO that would steward the company through bad times and good.  With all the information coming to them, they would keep appointing people, who would keep appointing people, keeping the company on the straight and narrow.

 

This model works, if and only if the shareholders have the information.  Anyone who has ever read a 10K knows the information isn’t really there for the normal individual, it’s only there for those that have dedicated time and energy into studying it.  Most people don’t have that time, and so they have appointed people, Brokers, to do it form them.  Brokers, who’s incentive is to make money, over the health of the companies.

 

So yes, the individual investors pay for being greedy, or not even keeping track of what their brokers are doing.  Again, I asked, what about the corporations employees?  The capitalist response (solution) would be employees should be the small investor in their own companies, that way, they are more inclined to better monitor and watch, and would be appropriately punished for the risks they are taking.

 

Once again, there is what would be right and what would be reality.  As I’ve pointed out, most large companies are not owned by individual investors, but other large investment houses who’s only need or want is to gain more profits even at the extent of the workers of those companies.  It is these large companies, investment brokers and dealers who are taking the risks; and the worker who pays the price.

 

 

The Corporation -as an entity- is defiantly punished; It becomes insolvent, ceasing to exist.   However, it also has no feelings; it does not have 40,000 individual stories, nor lives to live, children, or mortgages to pay.  The individual workers of these failing companies will be destroyed, homeless, unable to find new jobs in time to pay their bills.

 

The above is the argument of saving these companies, but it should be avoided. If one can give 85 Billion dollars to one company, then severing its 40,000 employees, that would still be 2.12million dollars per employee.  It would be easier to give them a severance package of 6 months salary!  And Cheaper.  This is why it’s easier to let them fail.  It’s cheaper to actually give these people unemployment at even 75% to 100% of their previous wage than to keep bailing these companies out.

 

Better transparency regulation is also needed so shareholders and yes, the individual investor, knows what they hell they are getting into.  The risk and rewards of the market only matter when they make sense.  Capitalist societies need better rules of trnsparency but not more regulation that save bad companies that should die.

  

OceansOfThought @ September 17, 2008