A way out of the bailout dilemma? Prevent corporate giantism.
The answer usually turns on the notion that some companies are simply "too big to fail" – the broader economy would suffer if the firm went under. It's an understandable concept, but for too long the exclusive focus has been on preventing failure. Maybe it's time to start preventing bigness, too.
The recent bailout, which Fed Chairman Ben Bernanke defended last week, has unleashed the usual torrent of scolding from the laissez-faire devotees who have criticized previous government bailouts of giant failing firms such as Lockheed, Chrysler, Long Term Capital Management, and big banks that gorged themselves on bad Latin American debt.
Such government intervention, these critics charge, is an abomination in a free-market economy: It nurtures "moral hazard" by rewarding failure, and encourages irresponsible decisionmaking by firms that assume the government will bail them out. It puts taxpayers on the hook for the private mistakes of others. And it is "lemon socialism" when firms keep the profits while taxpayers bear the losses.