I hope you had as nice a summer as we’ve had here in Salem. Lots of good weather, friends and family. And the arrival of my beautiful granddaughter Cora a few weeks ago.
The stock market also had a good summer, climbing back up to new highs, tariffs be damned. But once again, we are heading into some uncharted, or at least minimally charted, waters.
I’m talking about the recent news that the Federal government has acquired a 10% stake in Intel. And President Trump has indicated an interest in taking positions in other companies. This is not my father’s free-market capitalism.
This action has been controversial, although it is not entirely unprecedented.
The government bailout of Chrysler, for the first time, in 1979 came amid a great deal of debate and hand-wringing, but ultimately went through. It’s important to note I am not second-guessing the decision from the comfort of 45 years of hindsight. If I were there at the time, perhaps I would have made the same call.
Many at the time, and since, have thought it would have been disruptive to let Chrysler fail but that the pain would have been at least somewhat offset by increased sourcing and hiring at Ford and GM. And that overall, creating the expectation that the government was going to step in was sending us down a slippery slope.
When the phrase “too big to fail” entered the American lexicon during the 2008 financial crisis, it crystallized a troubling paradox. In a nation that prides itself on free-market capitalism, some corporations had grown so large, so intertwined with the economy, that their failure was deemed simply unacceptable. Too costly. And the government stepped in.
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The federal government’s record of bailing out these companies reveals pragmatic crisis management. But it is also a deeper failure of capitalism itself—where excessive poor management and risk-taking is rewarded, oversight is inadequate, and antitrust enforcement has been far too lax.
At its heart, capitalism rests on a simple principle: Risk and reward are linked.
You can have free market capitalism and you can have “too big to fail,” but you can’t have both.
Now, to be clear, truly unfettered free market capitalism is not practiced in the United States, or anywhere else for that matter. It may be a directional goal, but even the most capitalist economies practice a modified capitalism because people have found that there are public interests (health, safety, environmental, economic, etc.) that need to be protected.
That said, our modified capitalism has served us well and enabled an exceptional track record of innovation, productivity, and improvements in standards of living. Entrepreneurs and companies that innovate and succeed reap profits. Those that fail suffer losses, go bankrupt, and make room for more efficient competitors. This dynamic, painful as it can be, is essential to the system’s vitality, continuous improvement, and optimal success.
The Problem with “Too Big to Fail”
“Too big to fail” turns this premise upside down. It creates a world where the largest corporations privatize profits during boom times but socialize losses during busts. The taxpayer becomes the backstop for reckless decisions, while executives often walk away enriched.
In such a system, discipline is absent, risk-taking is unchecked, and the supposed invisible hand of the market that is supposed to punish such behaviors is shackled by government intervention.
The most glaring example came in 2008.
Years of financial deregulation and innovation in mortgage-backed securities left Wall Street awash in toxic assets. When Lehman Brothers collapsed, policymakers panicked at the prospect of a domino effect. The government poured hundreds of billions of dollars into the financial sector through the Troubled Asset Relief Program (TARP), buying equity stakes and propping up major banks.
American International Group (AIG), whose reckless bets on credit default swaps threatened the global system, was bailed out with more than $180 billion. General Motors and Chrysler, icons of American industry but plagued by inefficiency, debt, and weak management, were also rescued.
The rationale was stability: Millions of jobs and the entire credit system seemed to hang in the balance. And it’s hard to argue that. The impact of a string of corporate failures at that scale would have been massive, likely affecting not just the U.S. economy but the global economy as well.
Yet the long-term consequences were corrosive. Most executives kept their jobs. Many shareholders were bailed out (as a GM shareholder at the time, I’m here to tell you that not ALL shareholders were bailed out).
The COVID-19 pandemic offered another massive stress test. Faced with a government-mandated shutdown of economic activity, Congress unleashed the $2 trillion CARES Act, followed by additional relief bills. Airlines, hotels, and other sectors received billions. Large-scale government intervention at such a momentous inflection point was not new.
The response to the Great Depression pumped significant (deficit) spending into the economy as well. But in 2008 some new twists were added, including the Federal Reserve intervening in unprecedented ways, even purchasing corporate bonds.
Unlike 2008, this crisis was not rooted in financial misconduct, but the bailouts nonetheless reinforced the expectation that the government will step in to rescue industries deemed essential or politically influential. Meanwhile, small businesses often struggled to access the Paycheck Protection Program, and millions of workers bore the brunt of job losses and insecurity.
Again, large corporations with lobbying power fared best. The message: Systemic size and political clout guarantee survival. Smaller firms and ordinary citizens face bankruptcy and unemployment without such protection.
These episodes underscore the problem of moral hazard—the tendency for actors to take greater risks when they believe someone else will bear the downside. In finance, moral hazard is particularly dangerous. Banks that know they will be rescued have every incentive to chase short-term profits through speculative activity.
This cycle was visible before 2008, when banks leveraged themselves to precarious levels, confident that the government would not allow them to collapse. The crisis proved them right. Though reforms like the Dodd-Frank Act introduced new oversight and capital requirements, the essential dynamic remains.
By 2023, the failures of Silicon Valley Bank and Signature Bank once again triggered government intervention. Depositors were guaranteed beyond the FDIC’s $250,000 insurance cap. Officials justified it as necessary to prevent contagion, but the precedent reinforced the same pattern: large, interconnected institutions enjoy protections unavailable to ordinary businesses.
Antitrust Lapses and Market Concentration
“Too big to fail” is not just about banking. It is also the result of decades of inadequate antitrust enforcement. From airlines to telecommunications to technology, industries have become dominated by a handful of giants.
Mergers once scrutinized for anti-competitive effects have sailed through under the rationale that efficiency benefits consumers. But that efficiency comes at a cost. Consolidation has created companies so dominant that their collapse would cause widespread disruption.
Consider the airline industry: through mergers and bankruptcies, four carriers now control more than 80% of U.S. domestic flights. In tech, companies like Amazon, Apple, Google, and Meta wield near-monopolistic power. When firms hold this much market share, politicians and regulators hesitate to let them fail, fearing the ripple effects across supply chains, employment, and consumers.
The result is that management and shareholders reap the rewards when they are successful, while all taxpayers foot the bill when mismanagement or malfeasance would have otherwise sunk the company.
This concentration undermines capitalism by eliminating competition, stifling innovation, and cementing the power of entrenched giants. The larger these firms grow, the more they lobby to shape regulations in their favor—reinforcing a vicious cycle of size and influence, making it harder and harder for new players to emerge.
The persistence of “too big to fail” also reflects the weakness of regulatory institutions. Agencies tasked with oversight often lack the resources, political backing, or independence to enforce rules aggressively. In many cases, regulators become “captured” by the industries they supervise, adopting the same assumptions and priorities as those they are supposed to monitor.
Before 2008, regulators largely accepted the banks’ assurances that risk was under control, despite obvious red flags. Similarly, antitrust authorities in recent decades have narrowed their focus to consumer prices, overlooking broader issues of market dominance, labor exploitation, and systemic risk.
This lax approach reflects not just negligence but ideology. For decades, policymakers embraced the belief that markets self-correct and government interference is inherently harmful. The result: minimal oversight until disaster strikes, at which point only massive intervention by the government can avert catastrophe.
The bailout era has not only warped capitalism but also corroded public trust in government. Millions of Americans watched as Wall Street received a lifeline in 2008 while homeowners lost their houses as a result of the crisis triggered by corrupt practices. And literally only one individual was held criminally liable for actions that led up to that event. In 2020, large corporations tapped relief funds while ordinary workers queued at food banks.
This sense of unfairness fuels populist anger on both the left and right. Progressives decry corporate welfare and demand stronger regulation, while conservatives rail against crony capitalism. The common theme is resentment toward a system that shields the powerful while leaving everyone else picking up the tab.
If the government follows through on taking stock in more companies, that only further tilts the playing field away from free market capitalism. While domestic dissent is muffled, China’s practice of choosing winners and losers is one of the major impediments to investing in Chinese stocks – government favor can be fickle, and a company that is up today can be down and out tomorrow purely as the result of somehow offending the wrong official.
That is NOT how to maximize an efficient economy.
(NOTE: As always, I write here about the investor implications of policies and economics, and do not comment on the politics.)
Rethinking the Rules of the Game
So, if “too big to fail” is a failure of capitalism, what is the alternative? Several reforms stand out:
- Break Up Concentrated Firms: Reviving antitrust enforcement to prevent excessive consolidation would reduce systemic risk and restore competition. No firm should be so large that its failure threatens the economy.
- Stronger Oversight: Financial regulators need both authority and independence to curb excessive risk-taking before it spirals out of control. Capital requirements and stress tests should be robust and regularly updated.
- Clear Resolution Mechanisms: When large firms fail, there must be mechanisms for orderly liquidation without taxpayer bailouts. The Dodd-Frank Act’s “orderly liquidation authority” was a step, but it remains underused.
- Align Incentives: Executives should face personal consequences for reckless behavior, including clawbacks of bonuses and stronger civil and criminal liability for misconduct.
- Public Accountability: Any crisis intervention must come with transparency, strict conditions, and an explicit exit plan to prevent permanent government entanglement with private enterprise.
- Failure Insurance: If companies are determined to be too big to fail, the government or private insurance carriers can pool that cost and risk and charge companies premiums to fund the costs of bailouts, to align risk/cost with reward.
The repeated bailouts of corporations reveal a contradiction at the core of American capitalism. Markets are supposed to reward prudence and punish recklessness. But when the largest firms know they will be rescued, the discipline of failure disappears.
“Too big to fail” is not just an economic challenge—it is a distortion of the very principles on which capitalism rests. It rewards excessive risk-taking, entrenches inequality, and undermines faith in both markets and democracy.
We have long had companies that are too big to fail. We call them utilities – electricity, natural gas, telecommunications – and we regulate them.
If policymakers are serious about preserving capitalism – and it seems clear to me that our form of modified capitalism is highly successful and worthy of protection – they must confront the reality that no company should be above failure. Otherwise, the system will continue to breed crises, bailouts, and public disillusionment and anger.
The invisible hand of market forces cannot function when it is forever guided by the heavy hand of government rescue.
What do you think of past government bailouts? Or of the government taking ownership stakes in companies? Good, bad or indifferent? I’d love to hear from you. Email me at support@cabotwealth.com.
For your investing success,
Ed Coburn
President
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