Too Big to Fail? You're Doing it Wrong

Editor's Note: This is by regular AlterNet commenter Heroesall, who writes the Unstuffed Blog.

One of the reasons for the massive bailout is that many of the ailing banks are ‘too big to fail’. That is, when they go down, they’ll drag the whole economy with them, and we’ll all be reduced to eating our own ear wax to survive.

But given that bubbles, recessions, and depressions are built into our economic system, why were they allowed to get that big? And those things are built in: with our economic rules, it’s inevitable. I laugh a hollow laugh of scorn at anyone who has the temerity to suggest that the magical free market will prevent market domination - clearly it doesn’t, and hasn’t. The free market theory promises that there will always be healthy competition, because large companies will grow too large, and smaller, leaner companies will leap in and snatch market share. Probably then we’ll all get ponies as well.

It doesn’t take much awareness to notice that market domination is a reality. Anyone over four years old who doesn’t know names like Coke, Microsoft, and Nike isn’t paying much attention. The big banks magnify that, because they’ve got a vast heap of our money in their hot little hands.

But what those banks are doing with that money is not investing - it’s gambling. They’re not putting that money to work in real businesses that do real work, using it to buy goods and services which keep the money in circulation. Sure, they’re lending money, but they’re lending it to people who are doing naughty things with it, such as speculation.

But it gets worse. If they were lending only the money they had, it wouldn’t be too bad, but they’re lending money they don’t have. The concept of the fractional reserve means that they can lend out multiples of what they’ve actually got, and that, sort of, creates money. It creates money on their books, and since they’re lending several times what they have, they’re lending out squillions to people who are all gambling against each other.