TBTF

If you have been following the U.S. financial crisis you will have heard this term – Too Big To Fail and its acronym TBTF. It refers to those huge, globally interconnected financial firms that if they went down would drag down a significant part of the economy with them. The government reasons that the cost of the company going down is larger than the cost of bailing them out. Hence we get the Bear Stearns, Fannie/Freddie and AIG bailouts.

We have the same issue in economic development – although we haven’t used this clever acronym yet. That is companies that are perceived to be TBTF and are continuously bailed out by government. Think the coal industry in Cape Breton, textile mills in Northern NB, UPM’s mill in the Miramichi. The thinking is that the cost of them failing is higher than the cost of pumping more government money into them.

I think this point needs to be heavily debated among economic developers and public policy makers. I can’t think of one conversation, one report or anything else where this was properly debated. My own opinion, well known to readers of this blog, is that we need to be very reluctant to bail out companies and subsidize bad business models. There is hardly a situation where this is warranted in my opinion. As always, I would never say never with this stuff.

Take the issue Cape Breton. Something like $4-5 billion in direct subsidies to the coal industry over a 20-25 year period. I read that the industry didn’t make any profit going back to the early 1970s. That could be wrong but suffice it to say that there were huge government subsidies just to keep a dying industry afloat. Then it shut down anyway and left the island in a serious economic hardship that it is still trying to climb out of. I would said they should have wound it down when it wasn’t economically viable and invested those billions into new infrastructure and economic development.

Consider Tuscany. It’s a relatively poor region of Italy known for its beauty and you guessed it – tourism (the anchor of most poor economies). The EU is investing a billion dollars (and I assume there is Italian money in there as well) to tranform the Tuscany region into a high tech, research-oriented economy and to attract global technology firms. You can see their advertisments on Canada’s Business News Network among others.

You can sink hundreds of millions into losing projects, you can say enough is enough and just cut if off altogether or you can say there is a public interest in supporting the economic development of underperforming regions and you can strategic invest in them in a way that makes them more attractive for global business investment.

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0 Responses to TBTF

  1. mikel says:

    That is a HUGE issue, not least of which is the lack of regulations that LET them get huge in the first place, then lets them blackmail the government. Talk about having it all.

    But that’s where organization gets you. The EU model is known to be at least nominally progressive. Tuscany, and of course its precursor-Ireland. It’s still a neo liberal global model, but its at least better than “if your poor then move”.

    The most important thing to remember is the pure hypocrisy of it-they are simply lying. It won’t ‘bring down the economy’, what it’ll do is affect the bottom line of investors-which they don’t want to see. It’s actually GOOD for the economy, because then smaller more decentralized business models have an opportunity to grow. Huge corporations are very efficient technically, when they buy up smaller companies the first they do is axe the staff. More smaller companies=more staff, which equals more people in the economy to buy stuff.

    That’s the difference between ‘investment’ and ‘economy’.

    In NB its much the same. Study after study shows how much the economy could improve-that’s a virtual given. I’ll give an example. The big lease holders essentially need only one guy on one skidder to wipe out of forest. That takes incredible ‘investment’, the company usually has to go to the bank and set up a lease which has all kinds of tax implications that usually mean the taxpayers are funding it. However, smaller woodlot owners can’t get that kind of investment, so workers do it. There’s your ‘instant economy’.

    It’s so obvious that that’s why so much effort is put into trying to convince people that these companies are too big too fail. It’s the ultimate blackmail, and really too foolish to comment on.

    As for subsidizing, you are right, that needs LOTS of commentary. There is a HUGE difference between giving Irving 9 million or else they’ll move to quebec, and bailing out a caissie populaire where entire villages have all their savings. It’s the difference between bailing out investors, and bailing out families or workers. HUGE difference, which is virtually never discussed.

    There is a valid point to HOW those are handed out though. I know a guy who had eight employees and every year he had the connections to get to the right guy in government and told them if he didn’t get money then five of those people would lose their jobs. And the guy always had a new dodge viper or yacht,etc.

    However, I ran a small business in NB, and so do you. You know damn well what would happen if you were going bankrupt and showed up at the government. The most illustrative example is to look at restaurants. WHen economies go bad, they are the first to tank. The guy from Pizza Twice showing up to get a bailout is going to be sorely disappointed, even if all he needed was ten grand he needs to get through the month (but that his banks interest rates would wreck).

    That’s, of course, what all the people were protesting about for all this Atlantica stuff. There is ‘free trade’ and then there is what they call ‘globalization’. As many economists pointed out, NAFTA is less a free trade model than it is an investor rights protector. An american company can sue canada for infringing its ‘right to profit’, but you or I certainly can’t sue the american government.