September 20, 2008

Too big to fail

There is a lot of talk about how we need more governmental regulation of today's enormously complex financial markets, but the obvious problem with that is that barely anybody understands how today's enormously complex financial markets work, and those that do generally have better things to do than get paid at civil servants' salary levels.

So, what we need are a few new but simple regulations. But those are hard to come up with. Let me toss one idea out there: We shouldn't permit financial institutions to get too big to fail.

The analogy to antitrust legislation is obvious: we don't permit businesses to get too big to compete, so why let financial firms get too big to fail?

For example, in 1987 the Reagan Administration Department of Justice vetoed the acquisition of the marketing research firm I worked for by Nielsen because it would leave only two competitors in the consumer packaged goods sales data industry. You didn't even know there was an industry that measures whether Crest or Colgate has higher market share? Well, it's not much of an industry, but the Reagan Administration considered it important enough to insist that it be a three company industry rather than a two company industry. This decision may have cost me, say, $100,000 or more in paper profits on my stock options in my employer, which went from worth $20 per share to below water, but I don't recall too many being outraged by my loss. That's how the antitrust laws work, going back to 1911, when the Supreme Court ruled that the Standard Oil Company should be broken up under the 1890 Sherman Anti-Trust Act. Standard was split up into three separate competitors.

Why not do the same thing to firms threatening to be too big to fail?

First, once this crisis is over, don't approve mergers that would create firms above a certain threshold in too-big-too-failness.

Second, firms that are already over the threshold would be given, say, three years to split themselves up into firms under the limit. Fast growing firms could plot out their futures and make plans to voluntarily divest themselves of some units, or split like amoebas before they reached the penalty threshold.

This doesn't penalize stockholders unduly (other than that they lose their too-big-too-fail premium). Instead of holding one share of TooBigtoFail Inc, they hold one share each in PrettyBig Inc. and FairlyLarge Inc. Are there enormous economies of scale in the financial industry that would be lost? Perhaps, but how do they compare to all the other losses we've seen due to too-big-to-fail moral hazard? If you want FDIC insurance on your million dollars in bank savings, the government doesn't let you keep it all in one bank, even though there would be economies of scale in doing that. It forces you to diversify among ten banks.

We already know how to do this in antitrust law. We've been doing it for 97 years, and it's not all that controversial anymore.

Consider the alternative, as we've seen it this week, to having written laws and regulations explaining in black and white ahead of time how big a financial firm can be before it must split itself up: government bureaucrats and contractors, in a caffeine-fueled frenzy, deciding which firms are too big to fail (AIG) and which ones aren't (Lehman).

Why let them get that big in the first place?

My published articles are archived at -- Steve Sailer


neil craig said...

I had thought of somethinmg similar - that companies with over say, a 25% market share, should pay a slightly higher rate of corporation tax (or rather, since I think CT the most economically destructive tax, that everybody else pay a lower rate. This would allow caompanies like microsoft, which may legitimately be bigger than all their competitors because they are better, have the option to staying together if they think the price worth paying.

Henry Canaday said...

Sounds like a good direction to start out on, but it may be more complicated in practice. We have had antitrust standards on mergers for a century, but it has only been in the last 30 years or so that these have been fairly clear, reasonable rules to protect society (and they still sometimes require litigation to define). Before that, antitrust law was often used as a club by rivals of the merging entities to fend off more effective competition.

In the case of finance, the phrase Too Big To Fail may be a short-hand designation for an entity that is connected with, and depended upon by, too many other entities in too complex ways for the consequences of failure to be known. The lethal levels and types of connections may be hard to define, monitor in real time or prevent.

The alternative is to prevent other financial firms from becoming too dependent on any one Giant Firm, or Giant Market Sector, or Conventional Economic Assumption. I think that is why the consensus reforms are 1) higher capital ratios; and 2) greater transparency of the books.

I certainly agree that A Few Good Regulations are the best response. Since financial deregulation began, we have had bubbles and bailouts, but we have also had 26 years with only two minor recessions, the best record of macroeconomic stabilization in our history.

robert61 said...

Nice intellectual judo, using the baseless concept of too-big-to-fail in your solution. In reality, though, there is no such thing as a company that's too big to fail, and letting these ones do so would quickly redeploy their assets and wash out the system, with the added benefit of killing off the immoral assumption that government will bail out failing companies, just as long as they're big enough at.

Antitrust legislation is a perfect comparison, but maybe not in the way you think. There is little clarity about what constitutes an excessive share of the market (how could there be, given that government's trustbusting role is BS from the get-go?) and this very lack of clarity necessitates lobbying on the part of our largest companies - ensuring that politicians can stick their greasy little sausage fingers into corporate coffers without even leaving Washington.

As amusing as it is to fight BS with BS, I can only see your idea causing more misery. What a depressingly Brezhnevian discussion.

Anonymous said...

That's a good, commonsensical approach to financial regulation squarley within the American legal it's almost certainly not going to be adopted.

Good idea, though.


Linda said...

My thought exactly! I'm not a financial expert, but it seems to me if the world's economy is going to crater if these few big companies aren't rescued, maybe these companies shouldn't have been allowed to have such a stranglehold in the first place.

Doug_s said...

I used to work on Wall Street. People came to NYC when they wanted to buy 50 Boeing 747's (instead of going to, say, London), because you could raise $500 million easily in NYC. Get GOldman as lead underwriter, a few phone calls, sign some papers, poof a wire arrives in your designated account.

Try to raise $500 million with a group of ma and pa corner banks (each with their lawyer trying to insert a clause in the documantation). Right now, if you need to borrow a LOT of money, you go to NYC. If China or Dubai sovern wealth funds invested in things other than treasury bonds, you might go there.

Born Again Democrat said...

Outlaw over-the-counter derivatives between private parties, especially default credit swaps, that put more of a firm's or individual's net worth at risk than they have, especially through leveraging.

Investigate investment strategies that consistently return 15 and 20 percent annual returns for precisely such hanky-panky.

Chief Seattle said...

Steve, this is a very good suggestion. 5% market share might be a good place to start the discussion.

It's also tilting at windmills since the entire government is owned by the same bankers who are getting their trillion dollar bailout right now.

steve said...

Steve, you are confusing monopoly (i.e., pricing) power with causing systemic risk. A financial firm can be large enough to cause systemic risk without having monopoly power.

AIG was a good example -- they had strong competitors in every area, including the CDS (credit default swap) market where they got into trouble.

Modern finance is just complicated enough that it is beyond the comprehension of all but the top few percent of the population. (This is quite evident in the comments on your blog over the last week.) GWB is very lucky he has a good Treasury Secretary right now. His previous two were not up to this job. (Thanks, Goldman!)

Note that Obama worked as a financial writer and once wrote an article on interest rate swaps. McCain / Palin, not so much.

See here for explanations in pictures :-)

Eric said...

The problem isn't that the companies are too big to fail. The problem is they're so interconnected via insurance and derivatives they all fail if one fails.

Chopping large companies into smaller ones won't address that problem.

ash said...

Hey, that was exactly what I thought when I heard the "too big to fail" stuff. We agree.

If the companies were small enough, then they could fail, and hardly anyone would notice. Like when the U.S. involvement in helping Ethiopia drive Al Qaeda out of Somolia was so small that no one noticed.

Anonymous said...

"Why not do the same thing to firms threatening to be too big to fail?"

This is in place for Bank of America. There is a ten percent limit on deposits in retail banking and B of A is up against the limit. B of A can not do any merges with other retail banks, so it bought an investment instead to get bigger.

The rule should be that any company has an asset cap. They shouldn't accept assets over the cap.

Make the cap $400 billion or so....

KlaosOldanburg said...

Bush just called the economy a "house of cards" on C-SPAN.

The problem with regulating our way out is that the money will just move to London, or Hong Kong, or Dubai, or wherever there is the least regulation. The same way that it flowed into ultra-leveraged, non-"transparent" stuff.

Anonymous said...


Anti-Trust has an enormous depth of economic and legal research behind it. This is not your specialty and it shows. Don't dilute your brand with posts like these anymore.

Half Sigma said...

Steve, this is one of the most insightful posts written on the financial crisis that I've seen. Good work.

Regarding economies of scale, there are no value creation economies of scale, only marketing economies of scale. So the nation's output of real economic value will not suffer from breaking up of oligopolies.

halfbreed said...

Steve -- That's a very good idea, but it is not really comprehensive enough. The problem these days isn't just that a Wall Street firm might be too big to fail, it's that all these firms are so ultra-leveraged and interdependent that if one fails, it takes down a whole bunch of other financial institutions with it, setting off a chain reaction which would bring down the entire financial system. Think of AIG: they had staggering amounts of credit default swaps outstanding; these are essentially insurance on other other firms' bonds. (The CDS market, which totaled 900 billion in 2001, now totals 45.5 trillion, an incomprehensible sum.) If AIG had defaulted, all of its paper would be near worthless, and practically the entire financial industry had huge counterparty exposure which would have gone kaput. And these other financial institutions are also all so highly leveraged that if they lose just a small fraction of their assets, they go bankrupt too. So the domino effect would have been devastating. Most of the major investment banks would have failed (a few already have, obviously) many of the major banks would have gone under, nobody would have confidence in anything financial institution (or instrument), the stock market would have cratered, and the downward spiral would have sucked us all in. Most people don't realize how close we've come to having another Great Depression.

Another thing which most don't realize is how extremely leveraged our financial institutions have gotten. You know how people are always warned away from investing on margin because it's too dangerous? What margin means is that for every dollar you own, you're allowed to borrow another dollar from your brokerage, so that you can make two dollars in investments. And it IS dangerous: I have a friend who at one point was extremely wealthy (well north of nine figures) who was practically wiped out that way. But think of this: for the investment banks, they get to borrow up to thirty dollars for every dollar they actually own. That's insanity. All you have to do is have your assets depreciate around three percent to get wiped out that way. It's a house of cards, as Steve said in a recent essay. And all it took was a small breeze to blow it over.

If I had to point the finger at one guy who's to blame for this whole mess (and there are plenty of people who are culpable), it would be Christopher Cox, the head of the SEC. Four years ago he allowed the investment banks to raise their cash ratios from 12 to 1 to 30 to 1. The Bush administration has been nothing but a whore for the corporation right from the start, and this is maybe the most egregious example. It was a prescription for disaster, and now the government has to step in to avert another Great Depression.

BTW, this blog focuses largely on racial differences, especially in IQ, and the implications for society. I agree with Steve on these issues completely, which is why I hang out here. And the straw that broke the camel's back here may well have been all the subprime mortgages extended to NAM's. But I think the larger culprit in the current mess is the guys at the i-banks, the so-called best and brightest, who took tremendous risks in an effort to make money. The parallels with the S&L crisis of twenty years ago are overwhelming. In both cases, the government essentially gave private industry license to gamble with taxpayer money. With the S&L's, by insuring depositor's accounts up to $100,000, that allowed the S&L owners the freedom to gamble with that money any way they wanted (usually, in that case, real estate). If the investments turned out well, the S&L owners ended up rich. If not, well, the government (i.e., taxpayers) was on the hook. In today's case, allowing the i-banks to get so highly leveraged had the same effect. The bankers took huge risk, and if it paid off, they got rich. If it didn't, well, they were "too big to fail", and the rest of us taxpayers paid. It's completely unjust; but the alternative is another Great Depression.

BTW, I worked at one of those i-banks as a bond trader for twelve years, and I know the mentality of those guys well. They all pride themselves on their risk-taking ability, equating that with masculinity and personal courage, pathetic as that sounds. And they all also know that the downside is that they lose their jobs, while the upside is that they get rich. And trust me, Wall Street attracts more than its share of narcissistic personalities and even sociopaths, neither of which personality type spends an inordinate amount of time worrying about losing other peoples' money. If, four years ago, you had been the sole voice of reason at your trading desk and had warned your colleagues that they were taking too much risk, that the subprime stuff they were dealing in was just too dicey, you would have been scorned for your lack of cojones and aggression and ambition. That's the atmosphere on a lot of the desks. There's also a lot of concern that you might be losing market share to a competitor, and both of these attitudes feed on themselves. Then, when you couple that mindset with a license to gamble thirty times your own capital, it's a prescription for disaster. Which is exactly what we got.

Anonymous said...

Mark Cuban has some commonsense suggestions that would help in some areas:

C. Van Carter said...

I'm not sure if it's that simple. Should BOFA not have been allowed to buy Merrill Lynch, for example?

What I notice about the current regulatory situation is how Fannie and Freddie not only don't get broken up, because of government backing they become huge. Market concentrations of no consequence, like the merger of Sirius and XM, face excessive scrutiny.

albertosaurus said...

The problem is psychological not economic. Anti-trust actions by the government are potentiated by widespread public fear of rich people and their greed. It is assumed that unrestrained CEOs will inevitably do mischief.

There is no similar animus about government bailouts. Most of the public will approve of a government bailout no matter what the size. Few will consider the long term economic implications.

The simple fact is that the electorate is abmismally ignorant about even elementary economics.

Consider the debate over the minimum wage. We know its effect is to render minority youth unemployable. Indeed it was originally proposed for just that purpose by the English Eugenicists. American Eugenicists adopted the minimum wage idea so as to keep Chinese employment from being attractive to potential employers.

Yet today minimum wage legislation is argued as if it were of benefit to minorities instead of being a program specifically aimed at harming minorities.

Ask around, you are unlikely to find a man-on-the-street who understands the economic implications of minimum wage.

Economic issues must be packaged as easy to comprehend shiboliths like: "right to work", "open shop", and "greedy capitalists". Your proposal is a bit to subtle for the voters.

headache said...

My financial knowledge is limited and I am not an American. But I would think the main problem was that banks and lenders could resell the loans they had made, in effect passing on the responsibility. If banks had to sit on the loans they made and were effectively dependent on the homeowners paying back, they would never had indulged in the sub-prime market, even if Congress and Obama had legally tried to force them. Obviously reselling coupled with the diversity manipulation was an easy way for them to make quick money and pass on the buck. When you decouple responsibility with fiscal power things always go wrong.

Anonymous said...

iSteve reader???

Anonymous said...

Two problems with this.

First, size isn't always a good proxy for potential systemic risk. Bear Stearns, for example, was deemed to pose a systemic risk but was one of the smaller stand-alone investment banks.

Second, sometimes the bigger firms provide a needed stability, e.g., JP Morgan stepping in to buy Bear or BofA stepping in to buy Merrill.


stari_momak said...

First of all, I'd like to second the comment on the thought. Original definitely, thinking out of the box.

Here is the problem, however. I am not sure having a bunch of little companies all doing exactly the same thing, either because its fashionable or the most profitable or whatever, would have avoided this mess. As near as I can figure out, these companies were all using models of average numbers of defaults , controlling for this that and the other, to package and sell/buy mortgages, thinking that the law of large numbers would keep them safe. The models assumed that defaults were independent events, or at least underestimated how dependent they were -- how one default would increase the chances of another and so on. Now, in our age of the infobahn, it is likely that even small companies would get a hold of these models and go for the latest and greatest, and therefore all of the little guys would be just as vulnerable.

After all, it was the small banks (Northern Rock in the UK, Lehman in the US) that went first in this 'crisis'. Would more banks, smaller dominoes in the chain so to speak, give us more time to react, or even give market self-correction time to work. Probably has more chance than having a few reallybig players, but I wouldn't bet the farm on it.

Half Sigma said...

"Consider the debate over the minimum wage. We know its effect is to render minority youth unemployable."

Hogwash. The minimum wage does exactly what it's supposed to do: benefit the poor at the expense of the not-poor.

Does a minimum wage hurt the worker?

Of course, consistent with the theme of this blog, I'm in favor of stopping the immigration of more low-IQ people so that there are less poor in the United States who are in need of benefit.

anony-mouse said...

1/ At what level would you put 'too big to fail'? And how would you adjust it over time?

Normal anti-trust laws relate to market share which can never go over 100%. But the absolute size of a financial institution?

2/ Doing what you're suggesting would simply make London again the world financial capital. (which may be happening again anyways thanks to SOX.)

There's a reason why so many corporations are domiciled in Delaware. The same will happen to financial institutions if too many regulations are enacted (and they won't be moving to Delaware or any other US state)

LomaAlta said...

The US House of Representatives has the Constitutional duty and authority to originate revenue bills. But, bureaucrats in the Fed and Treasury can give away a trillion dollars of taxpayers' money? Things are way, way out of reason.

rightsaidfred said...

halfbreed's post is an excellent summary.

>>>>[Cox]allowed the investment banks to raise their cash ratios from 12 to 1 to 30 to 1.

In other words, Cox allowed leverage to become more liberal. LIBERAL.


I feel better now.

Reg Cæsar said...

Hmmm... I've long thought that a $20/hr minimum wage for foreigners would be a good way to help American workers.

Apparently, Half Sigma believes that a $40/hr minimum wage for all would help American workers as well. Somehow I don't see this working.

mnuez said...

I'm pleased to see that more people here understand minimum wage than misunderstand it for it isn't very hard to understand.

The higher the minimum wage, the less jobs there are that "Americans just won't do" and hence the smaller the rationale for importing foreigners and the less feasible employment becomes for those foreigners who sneak into the country illegally.

If you need to pay your cooks $12 an hour in any case, you're going to choose to higher clean, educated lower-middle-class white folk rather than decrepit...others.

But if you can get away with hiring a staff of kitchen people for $5.15/hour your greed might convince you to forgo the English, the legality and the smaller likelihood of being victim to a violent crime.

Raising the national minimum wage to the living wage would do more for citizens of this country (and white people in particular) than almost any other piece of legislation conceivable.

André Tchelistcheff said...

georgesdelatour: Will someone PLEASE tell me what "NAM" stands for?

Non-Asian Minority

American Goy said...

Not mine but I used them on my blog.

Who says Americans are stupid?

"Never has so much been given by so many to so few."

Best explanation I saw so far:
"Let me get this straight...banks knowingly sell bad loans, they then knowingly package these loans into bad investments which they then sell, they do this while at the same time betting the housing market will crash.......and then they get bailed out by the very same people conned into the bad loans in the first place. So the tax payer gets stuck with a loan they cannot afford and then get stuck with the bill to help bail out the crooks that sold them the loan? How f****ed up is that?"

"Henry Paulson was Goldman Sachs CEO before he became Treasury Secretary. Did people think he was going to forget to give his investment banker friends a hand? Imagine that, you can keep making moronic bets on the most unlikely things -- if you win, you get to keep the profits. If you lose, pass the bill on to Uncle Sam. From an investment banker's point of view, that scheme is brilliant!"

"In 2007, the CEO of a Standard & Poor’s 500 company received, on average, $14.2 million in total compensation, according to preliminary numbers from The Corporate Library, a corporate governance research firm. The median compensation package received was $8.8 million."

And finally:

$81,884 per U.S. taxpayer - cost of the bailout

Reg Cæsar said...

Actually, "living wage" is itself a fraud. The concept used to be family wage, or the ability for the average man to rear a sizeable family on one income. But try getting PC living-wage activists even to mouth the phrase... it's been abandoned by all but a few paleocons.

Boy, has this thread got off its original subject. Maybe we can inspire Steve to post on the minimum wage itself.

gf said...

Raising the national minimum wage to the living wage would do more for citizens of this country (and white people in particular) than almost any other piece of legislation conceivable.

The last job I worked as a software developer, I made less per hour than a musician-friend of mine makes ($20+) for working in the unionized mail room of an "essential service."

At the job prior to that, I worked with a Slovakian guy who had a Comp. Sci. degree and an MBA, and who was making $15/hr for doing web development.

A high-minimum-wage (and/or widely low-skill-unionized) environment may indeed drive out the unskilled immigrants. But it also removes a lot of the financial reason for the natives to take the trouble to become skilled themselves--especially when a glut of H-1Bs already exists to work the skilled jobs for only slightly more than the "living wage."

Me, I intend to work on my mail-handling and short-order cooking skills. You know, to get ahead in the "New Economy," with a $12+ minimum wage.

jnt said...

Hi Steve,

Let's subject your idea to a simple thought experiment.

Specifically; imagine that we implemented your proposal a few months ago and split AIG into three smaller companies that are not "too big too fail" by some criterea of bigness.

It makes no difference! You now have three smaller companies that are now collectively "too big to fail", and still the government will be compelled to act.

jnt said...

Hi Steve,

Let's subject your idea to a simple thought experiment.

Specifically; imagine that we implemented your proposal a few months ago and split AIG into three smaller companies that are not "too big too fail" by some criterea of bigness.

It makes no difference! You now have three smaller companies that are now collectively "too big to fail", and still the government will be compelled to act.

C. Van Carter said...

The Fed isn't being bashed anywhere near enough.

Were, as some argue, accounting rules a major contributing factor? It's difficult to accept there was another layer of insanity to this.

Half Sigma said...

Someone wrote something about raising the minimum age to $40 hr--I'll ignore this ridiculous straw man argument, and respond to a more important comment.

anony-mouse who wrote: "Doing what you're suggesting would simply make London again the world financial capital."

This is a very valid point. As we know, the U.S. no longer manufactures anything, we make our money through marketing and capital investment and by transferring value created in other countries to our country. Thus the financial services industry is one of our most important industries, and not something in which we want to lose our competitive advantage.

We definitely don't want any regulations that would cause the the money to go to London or Tokyo.

Anonymous said...

American Goy,

You should have a Jew double check your math next time. The upfront cost of the bailout -- $700 billion -- works out to about $2,300 per American, not $80k per. Second, if you understand what Paulson is planning, the idea is to buy mortgages at steep discounts to face, e.g., 40 cents on the dollar. They may never have been worth face, but they're probably worth at least 70 cents on the dollar. So, if this is done right, the government could actually make a profit on this when it unwinds the assets over the next several years.

C. Van Carter,

"Were, as some argue, accounting rules a major contributing factor?"

You're thinking of mark-to-market accounting. This forces banks to write down assets to their current market value even when there is no current market for those assets. That leads to bigger paper losses in the near term than would be the case if the assets were held to maturity or valued over longer periods.

- Fred

Appeal to Reason said...

Perhaps this is a good idea, but the first thing we need to do is to restore the previous regulations that we had in place before they were done way with by people like Phil Gramm (McCain's economic adviser) Robert Rubin, and Larry Summers (Obama's economic advisers). Specifically, I'm thinking of the Glass-Steagall Act, passed in the 1933 as part of the New Deal, and repealed in 1999 with bipartisan support. Glass-Steagall separated commercial and investment banking. The law that repealed it, the Gramm-Leach-Bliley Act, was of course the brainchild of Phil Gramm. The law in its final version was passed 90-8 in the Senate and 362-57 in the House, and enthusiastically signed by President Clinton.

What we are seeing today is the collapse of neoliberalism, the ruling idea of our age(not coincidentally, as Marx would say, also the idea of our ruling class).
Unfortunately, the idea is not dead. Both candidates have declared themselves firm upholders of the faith, as we can see from their economic advisers and their campaign contributions (Wall Street's given more money to Obama than it has to McCain).

Anonymous said...

How did the repeal of Glass-Steagall lead to this mess? It didn't. The banks that collapsed weren't combined investment banks/commercial banks but separate investment banks like Lehman and Bear Stearns. Phil Gramm isn't the devil and he didn't cause this.

Anonymous said...

I suspect $40/hr is a "straw man" only because Half Sigma would lose his job at that rate, but not at $12. Reminds me of the old joke that ends, "We've already established what you are, ma'am; now we're just haggling over the price."

Raising the minimum for foreigners only to the median is at least based upon the principle that no one imported should be allowed to compete against the bottom half of the population. Yes, it's discrimination. That's the whole point.

Anonymous said...

A high-minimum-wage (and/or widely low-skill-unionized) environment may indeed drive out the unskilled immigrants. But it also removes a lot of the financial reason for the natives to take the trouble to become skilled themselves--especially when a glut of H-1Bs already exists to work the skilled jobs for only slightly more than the "living wage." Me, I intend to work on my mail-handling and short-order cooking skills. You know, to get ahead in the "New Economy," with a $12+ minimum wage.

Most of us (opponents of mass immigration) would argue that both high-end immigration and low-end immigration have undesireable market distorting effects. I would be all in favor of reducing H1-B visas, and I'm not really (in theory) in favor of higher minimum wages.

In reality however, I'm in favor of anything that reduces demand for more foreign labor. A higher minimum wage is a mechanism (that Democrats will never argue with) for achieving that end.

Yes burger flipping, on rare occasion, might pay as much as prgramming. But our goal is to reduce the number of people in this economy who have no option but mail handling and short-order cookery, because that's all they're mentally capable of. Because the more power they get at the ballot box, the more the skilled citizens will be taxed.

The point that I think most of the regulars here would agree upon is that the USA needs an economy that provides jobs for people of all skill levels; that a stable country has needs for people at all levels; but that the current legal US labor force is already quite capable of meeting all these needs.

albertosaurus said...

I apologize for inadvertantly hijacking this thread.

I only mentioned the minimum wage issue to illustrate the need for an emotional hook for any public policy iniative that rests on economics. My point was that the idea of splitting apart big organizations so as to avoid their having to be saved by a public bailout is just too subtle to catch on. As an idea it lacks drama. There is no villian and no sympathetic group of victims.

My point was that a cerebral argument for economic reform is unlikely to catch on with an electorate that struggles with economic theory.

To illustrate this point I raised the hot button issue of minimum wage. Clearly I struck a nerve. The readership of this thread indeed reacted to this issue emotionally just as I had asserted.

Although it is off topic for this thread, let me point out a few points on the topic of minimum wage itself that were raised by others.

Some like Half Sigma deny that the minimum wage tends to decrease the employment opportunities of minorities. If that were true (it isn't) it would be a grave disappointment for the originators of minimum wage legislation. The original pupose of such laws was to make minorities unemployable. They wanted to remove the incentive of low wages from the employers so that only whites might get jobs.

Since the New Deal the minimum wage has been argued as a form of compassion for the poor - reversing its orginal intent. Today compassion sells better than eugenics. The real economic consequents are the same - the least attractive prospective employees (black youth) are prederentially excluded from the labor market. Labor unions full of older white members understand how this works. Unions enthusiastically support minimum wage legislation before congress. It benefits its membership. It tends to rid the labor market of non-member competitors.

If Steve's proposal is to advance he will need some sort of comparable emotional appeal.