Shultz on Too Big to Fail

In a PBS Newshour interview, George Schultz opposed the 700 billion bail outs for financial firms last year. As Labor and then Treasure secretary, he successively successfully opposed bailing out, or giving in to labor demands and pressures facing companies that were deemed too big to fail.

The basic principle he puts up against that is that when you have skin in the game, you take care of the money you manage. In the past year, this has certainly become a cliché.

But he also said that if a company is too big to fail, then it shouldn't be allowed to get that big. Here are the two mechanisms he would used to go about doing that.

Christmas lights

While he recognizes that some companies will have interests in becoming big, parts of their company should be individualized such that if one parts fail, not all of it fails. If the financial products department of AIG would have been allowed to fail without bringing down the healthier insurance department, that would have been better.

He used the analogy of Christmas lights. Before, when one bulb went out, the whole chain would go out and it took a long time to figure out which light bulb was bad the longer the chain got. Manufacturers solved the problem by creating a parallel mechanism in which one bulb can now go out without bringing the whole chain down. The same should be done for large companies that are too big too fail.

The bigger you are, the bigger your social responsibility

He also said some additional regulations are needed for very large companies that have large economic and social impacts. Mainly, a big financial companies should have larger capital requirements than smaller ones since the risk of failure affects so many more people.

This would inevitably mitigate some of the economic advantages gained from M/A's, but who would want to build a skyscraper without proper fire protection?