The Too Big To Fail Doctrine is cited today as the reason for bailing out our financial system and our auto industry. Hundreds of billions of public dollars have been sunk in this endeavor so far, with little sign that it has done more than just postpone the inevitable. In the financial sector, we knew from the beginning that we had to separate the "bad" banks from the "good" banks. What was missing was the political guts to do it. In the auto industry, we've spent huge amounts of taxpayer dollars to keep insolvent companies away from bankruptcy, and look where they're heading now.
The Too Big To Fail Doctrine is nothing more than the rebirth of government Industrial Policy, whereby politicians and bureaucrats pick winners and losers in the economy. Industrial Policy manipulates the free market to back favorites, often under the guise of saving our credit system and jobs (as now) or for national security reasons. I lived in Brazil when the military government decided to ban the import of computers in favor of local development. This put the Brazilian economy severely behind for many years. In some cases, Industrial Policy is a way to protect infant industries, such as when Japan and Korea allowed software and consumer electronics industries to develop to the detriment of free trade. Oftentimes, economies try to protect their "national champions," those companies deemed Too Big To Fail (the French love those).
The United States is not immune to Industrial Policy (Too Big Too Fail), though no politician since Walter Mondale in the '80s has dared promote it openly. The worst example of Industrial Policy in the U.S. is our blatant subsidies to the agriculture sector, often paying farmers to sit on their hands not to farm their land.
Too Big To Fail, aka Industrial Policy, is un-American. It saps the foundation of the American Dream. It mitigates against the level playing field necessary to establish the long-term success of new enterprises. It inserts short-term expediency where ideals and entrepreneurship are called for. It protects the status-quo against new ways of thinking.
This is the fourth time Chrysler has been bailed out in recent memory. At first U.S. taxpayers bailed out Chrysler under Lee Iacocca; then Chrysler was bailed out by Daimler from Germany; then Chrysler was bailed out by U.S. private equity and now U.S. taxpayers are bailing Chrysler out again with the help of Fiat. Are we to believe that Americans will buy enough Fiats a few years from now to make the company a success? I doubt it. The market has spoken loudly and often: we don't want to buy enough Chrysler automobiles to make it a viable business. And so why are our politicians insisting that this wreck of an industrial company be considered a national icon? How many politicians or members of the auto task force actually drive a Chrysler vehicle? It would make more sense to guarantee pensions and pay to retrain existing workers and help them find new jobs than to move ahead with a bailout.
As a venture capitalist, VC funds like mine finance Dreamers. Venture capital depends on Dreamers, who share the American Dream. No matter their age, background or experience, they all believe in "life, liberty and the pursuit of happiness." They share a basic capitalist belief that creating wealth from scratch is a vital societal task. These Dreamers are not looking for handouts. They want a level playing field in a country which will defend and support their efforts over the long haul. These bailouts of failing companies and institutions are getting in the way of our future innovators and dreams.
Companies mirror life. They start as a glimmer in a Dreamer's eye. They grow in fits and starts. Some fail. Those that survive either create new markets or invent better ways to address existing ones. Some become obsolete, some are sold, some are merged and some are closed. Just look at the list of Fortune 500 companies. On the latest tally published recently, 38 new companies made it to the list and another 38 were removed. That's a 15% turnover in just one year. Most of the companies on the list won't be there ten years from now. It reflects the survival of the fittest, which in business is the American Way.
It's no coincidence that countries with entrenched interventionist policies, such as France and South Korea, have a small and largely ineffective venture capital sector, limiting innovation and progress. Venture capital and a policy of Too Big to Fail make lousy bedfellows.