Monday, November 17, 2008

Too big to fail

Most of the supporters of the auto bailout (and other bailouts) claim that the bailout is necessary because otherwise a vast population (of workers in these and ancillary industries) will be adversely affected, as hilzoy says of the order of 1-3 million.

Obviously the argument is that these institutions are too big to fail.

Let me propose some remedies. Let us first suppose that above "N" employees a company becomes too big to fail. The exact value of "N" is not important. There are two possible solutions:

1. No company will be allowed to have more than "N" employees. In which case it will never become too big to fail and thus we will never need bailouts again


2. if company has more than "N" employees, confiscate some proportion of the gross company revenue (I say revenue and not profits because profits can be whittled down by generous compensation to management and workers) which will be kept by the government and released to the company when it desperately needs some cash and this release can be decided by Congress.

Any feedback about the two solutions proposed above?

P.S. To be fair, I did not think of solution 1, it was thought of by a friend of mine. Solution 2 is obviously inspired by solution 1.

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