An interesting article was published yesterday in the International Herald Tribune titled, “Is America too big to Fail?” In today’s world of globalization, the U.S. has been borrowing hundreds of billions of dollars from foreign countries, and while these countries of course expect to be repaid, it is doubtful that they are ready to take any drastic actions that could jeopardize the U.S. The author made several points about how countries have repeatedly bailed out companies deemed “too big to fail” and believes that the U.S. falls under that same category.
One of the most interesting points made in the article is how the U.S. for years has condemned countries for bailing out companies and interrupting the free market forces, yet the U.S. does the same thing. The most recent example of this is with the legislation that U.S. officials are working on to rescue Freddie Mac and Fannie Mae if needed. The whole point of the free market is that only the strong survive. By allowing the market forces to take their course, weak companies will get weeded out and it will force those remaining to be more diligent about how they are run. If you set the expectation, though, that the government will step in and bail companies out if needed then it allows the companies to be lackadaisical and take undue risks. By supporting companies that should have failed, we are only supporting poor business practices.
The problem is that fear of job loss and economic setbacks proves time and time again to be too much for governments. I’m not sure if that has more to do with the politicians' and other officials' true beliefs for what’s best for their countries, or if they just can’t see past their term in office (feel free to toss in your favorite Alan Greenspan joke here).
This might actually end up working out in our favor, though, considering that foreign governments are begging to make the same arguments in regards to supporting the U.S. China and Japan, for example, which are the two largest debt holders of the U.S. have a lot at stake in regards to the U.S. economy. These countries make a large portion of the goods sold to American consumers, so a slowdown in the American economy could potentially cost them a huge number of jobs and have a drastic effect on their economies. If they continue to buy American debt, though, and finance more buying of their stuff then things go on all nice and rosy--at least in the short term. The question is how long are these countries going to be content allowing the U.S. to buy their goods on credit? When will they finally draw the line? Just as when you bailout a flailing business you have to ask yourself, “what am I ultimately encouraging?” And whether they are actually going to turn things around or you are just going to be faced with bailout after bailout in the future. At what point do you cut your losses and move on? At least in the short term it is unlikely that our foreign creditors are ready to cut the bailout lifeline quite yet. Whether or not that is a good thing, though, for them as well as us, remains to be seen.